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

  1. Market analysis
  2. Private analysis
  3. Efficiency
    analysis
  4. Referent group
    analysis

Net benefits
to bank & government

Net
private
benefits

Net benefits
to host
community

Structure

  1. Market analysis:
    at market prices

Net benefits
to host
community

Net benefits
to bank & government

Net
private
benefits

Structure

  1. Market analysis
  2. 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

  1. Market analysis
  2. Private analysis
  3. Efficiency
    analysis: a mix
    of market &
    shadow prices

Structure

  1. Market analysis
  2. Private analysis

Net benefits
to bank & government

Net
private
benefits

Net benefits
to host
community

  1. Market analysis
  2. Private analysis
  3. Efficiency
    analysis
  4. Referent group
    analysis:
    two methods

A) Measure C & B to the referent group directly

B) Subtract non-referent net benefits from efficiency analysis 

Structure

  1. Market analysis
  2. Private analysis

Net benefits
to bank & government

Net
private
benefits

Net benefits
to host
community

  1. Market analysis
  2. Private analysis
  3. Efficiency
    analysis
  4. 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

  1. Market analysis
  2. Private analysis

Net benefits
to bank & government

Net
private
benefits

Net benefits
to host
community

  1. Market analysis
  2. Private analysis
  3. Efficiency
    analysis
  4. 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

  1. Project data
  2. Market CBA
  3. Private CBA
  4. Efficiency CBA
  5. 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