Benefit cost analysis BCA of public policies

1
Benefit cost analysis (BCA) of public policies

• Basic framework
• Perspective
• Project description
• Quantitative analysis of inputs and outputs
• Economic evaluation of inputs and outputs
• Comparison of benefits to costs
• Sensitivity analysis

2
BCA Perspective

• How far and wide are values to be counted?
• Local
• Regional
• National

3
BCA Local Perspective

• Only consider benefits and costs within the local
  governments jurisdiction
• Appropriate for funding by a local unit of
  government

4
BCA Local Perspective

• Should a project like the riverway path funded
  by the City of Radford count as benefits values
  to non-residents?

5
BCA Perspective Regional

• Appropriate when project is funded by one or more
  states or more than one local unit of government
• Example Chesapeake Bay Watershed Program

6
BCA Perspective National

• Appropriate for funding by federal government
• Benefits to one region at the expense of another
  would not be included since net national impact
  is zero

7
BCA Project description

• Two types of public programs
• Physical construction projects, e.g. dam, road
• Regulatory programs, e.g. rules in National
  Forests

8
BCA Project description

• Consideration of alternative designs
• Size
• Location
• Timing
• Construction
• Benefits stream
• Alternative projects

9
BCA Quantitative measures

• Measures of inputs
• Construction designs
• Operation and maintenance
• Measures of outputs
• Resources extracted
• Non consumptive use data
• With project versus without project states
• Consideration of alternative designs

10
BCA Quantitative measures

• Measures of inputs
• Construction
• Operation and maintenance
• Environmental costs of above

11
BCA Quantitative measures

• Measures of outputs
• Resources extracted
• Non consumptive use data
• With project versus without project states

12
BCA Before and after analysis

• Road construction
• Average commute now 45 minutes
• Average commute with project - 35 minutes
• ? project saves 10 minutes on future commutes

13
BCA With versus without project analysis

• Road construction
• Average commute now 45 minutes
• Average future commute without project 50
  minutes
• Average future commute with project - 35 minutes
• ? project saves 15 minutes on future commutes

14
BCA Economic evaluation

• Assess costs of inputs
• Evaluate benefits of outputs
• Use market prices for outputs traded in
  competitive markets
• Use shadow, corrected prices for goods traded in
  non-competitive markets
• Use non-market evaluation techniques to monetize
  non traded outputs
• Discount all future costs and benefits

15
Comparing benefits to costs

• Net benefits benefits costs
• Benefit cost ratio, BCR benefits/costs
• NB gt 0 is equivalent to BCR gt 1
• Internal rate of return find the rate of return
  for the investment

16
Comparing benefits to costs
17
Sensitivity analysis

• Observe how results change with changes in
  factors such as
• Scope of project design
• Predictions about inflations effect on future
  costs and benefits
• Assumptions about responses to project
• Distribution of costs and benefits
• Discount rates