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Efficiency Benefit-Cost Analysis

Measures the economic efficiency of the project: if net benefit is positive, the project is a more efficient allocation of resources than the alternative (the world “without” the project). | © Harry Campbell & Richard Brown School of Economics The University of Queensland BENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch. 5: Efficiency Benefit-Cost Analysis Efficiency Benefit-Cost Analysis Deals with the overall net benefits of the project irrespective of who gains and loses. Measures the economic efficiency of the project: if net benefit is positive, the project is a more efficient allocation of resources than the alternative (the world “without” the project). The distribution of net benefits is not relevant in efficiency benefit-cost analysis the project net benefit, as measured by the efficiency analysis, will accrue to various groups in various forms: the private sector proponents of the project, in the form of profits the public sector, in the form of taxes or charges the general public, in the form of employment benefits, rents, pollution costs etc. What is the standard methodology? The efficiency benefit-cost analysis is based on . | © Harry Campbell & Richard Brown School of Economics The University of Queensland BENEFIT-COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch. 5: Efficiency Benefit-Cost Analysis Efficiency Benefit-Cost Analysis Deals with the overall net benefits of the project irrespective of who gains and loses. Measures the economic efficiency of the project: if net benefit is positive, the project is a more efficient allocation of resources than the alternative (the world “without” the project). The distribution of net benefits is not relevant in efficiency benefit-cost analysis the project net benefit, as measured by the efficiency analysis, will accrue to various groups in various forms: the private sector proponents of the project, in the form of profits the public sector, in the form of taxes or charges the general public, in the form of employment benefits, rents, pollution costs etc. What is the standard methodology? The efficiency benefit-cost analysis is based on the “with and without” approach. In measuring project benefit ($X) and project opportunity cost ($Y): - ALL project outputs and inputs must be valued the prices used in the valuations must accurately reflect value or opportunity cost to the economy In attempting to measure value or opportunity cost, it is natural to look to the private market system. However: some project outputs or inputs may not be traded in markets e.g. pollution, outdoor recreation in some markets, the market price does not accurately measure the value of an output or the opportunity cost of an input. Summary In conducting efficiency benefit-cost analysis we will be faced with two kinds of problems: - missing markets, e.g. pollution, recreational fishing markets in which market price does not measure value to the economy, e.g. non-competitive markets, markets distorted by taxes or regulations We deal with these two problems using: - non-market valuation techniques, e.g. contingent valuation shadow-pricing techniques