ECF5560
Winter term, 2023
ICP Case study walk-through, Part 2
Cost benefit analysis & economic decision making
Dr. Emilia Tjernstrom
1. Market analysis
2. Private analysis
3. Efficiency analysis
4. Referent group analysis
Structure
- Market analysis
- Private analysis
- Efficiency
analysis - Referent group
analysis
Net benefits
to bank & government
Net
private
benefits
Net benefits
to host
community
Structure
- Market analysis:
at market prices
Net benefits
to host
community
Net benefits
to bank & government
Net
private
benefits
Structure
- Market analysis:
at market prices
Net benefits
to host
community
Net benefits
to bank & government
Net
private
benefits
Structure
- Market analysis
- Private analysis:
market prices
less tax & interest
Net benefits
to host
community
Net benefits
to bank & government
Net
private
benefits
Structure
- Market analysis
- Private analysis:
market prices
less tax & interest
Net benefits
to host
community
Net benefits
to bank & government
Net
private
benefits
Structure
Net benefits
to bank & government
Net
private
benefits
Net benefits
to host
community
- Market analysis
- Private analysis
- Efficiency
analysis: a mix
of market &
shadow prices
Efficiency Analysis is similar to Market Analysis, except that we use shadow prices when social and private values differ
Efficiency analysis
We want all costs to be quantified as the opportunity cost of the inputs, which is why we use shadow prices instead of market prices
Similarly, the benefits are the value of the outputs, at market prices if the market is efficient and shadow prices if there are market failures
Efficiency Analysis is similar to Market Analysis, except that we use shadow prices when social and private values differ
Efficiency analysis
We want all costs to be quantified as the opportunity cost of the inputs, which is why we use shadow prices instead of market prices
Similarly, the benefits are the value of the outputs, at market prices if the market is efficient and shadow prices if there are market failures
Let's go through some of our cost and benefit categories & think about what prices they should be valued at!
Efficiency analysis: imports
Imported goods in US$: valued at c.i.f, meaning the price at the border
Efficiency analysis: imports
Imported goods in US$: valued at c.i.f, meaning the price at the border
What about labour?
Efficiency analysis: labour
What about labour?
Remember: we're told all construction labour is unskilled
"There is considerable unemployment in the area and the shadow wage of unskilled labour recruited in the Bangkok area is assumed by the government to be 50% of the market wage."
Efficiency analysis
Imported goods in US$: valued at c.i.f, meaning the price at the border
What about labour?
Remember: we're told all construction labour is unskilled
"There is considerable unemployment in the area and the shadow wage of unskilled labour recruited in the Bangkok area is assumed by the government to be 50% of the market wage."
Efficiency analysis: electricity
Efficiency analysis: overheads & inputs
Structure
- Market analysis
- Private analysis
Net benefits
to bank & government
Net
private
benefits
Net benefits
to host
community
- Market analysis
- Private analysis
- Efficiency
analysis - Referent group
analysis:
two methods
A) Measure C & B to the referent group directly
B) Subtract non-referent net benefits from efficiency analysis
Structure
- Market analysis
- Private analysis
Net benefits
to bank & government
Net
private
benefits
Net benefits
to host
community
- Market analysis
- Private analysis
- Efficiency
analysis - Referent group
analysis:
two methods
B) Subtract non-referent net benefits from efficiency analysis
Net benefits
to bank & government
Net
private
benefits
Net benefits
to host
community
Structure
- Market analysis
- Private analysis
Net benefits
to bank & government
Net
private
benefits
Net benefits
to host
community
- Market analysis
- Private analysis
- Efficiency
analysis - Referent group
analysis:
two methods
B) Subtract non-referent net benefits from efficiency analysis
Net benefits
to bank & government
Net benefits
to host
community