ECF5560
Winter term, 2023
Lecture 2: Conceptual foundations
Cost benefit analysis & economic decision making
Dr. Emilia Tjernstrom
1. Structuring your analysis
2. Spreadsheet structure
CBA structure
Structure
Referent group
-
Community
-
Banks
- Government
Net benefits
to host
community
Net benefits
to bank & government
Net
private
benefits
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
- 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
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
Spreadsheet structure
Structuring data
Spreadsheet in 5 sections
- Project data
- Market CBA
- Private CBA
- Efficiency CBA
- Referent group CBA
Another example
A firm wants to invest $100 to produce 10 gadgets
per year for 5 years
- Need to hire 20 labour units at $3 per worker
- The location is a high unemployment area, where the opportunity cost of labour is $2
- Operating profits (revenue - cost) will be taxed at 25%
- The firm will price gadgets at $10
- Production will result in some local pollution worth $12 per annum, starting in year 1
Gorgeous gadgets
1) Market CBA
PVNB:
sum of discounted
net benefits
\frac{\sum_{t=0}^{T}{\text{NB}_{t}}}{(1+\delta)^t}
Can either calculate "manually" or using Excel formula
ECF5560-CostBenefitAnalysis-Lecture2
By Emilia Tjernström
