財政學(xué)英文版課件：Chap008 COST-BENEFIT ANALYSIS

1、COST-BENEFIT ANALYSISChapter 8Projecting Present Dollars into the FutureR=$ T=years r=interest rateHow much will $1000 earn in 2 years at an interest rate of 10%?R0 = $1000R1 = $1000*(1+.01) = $1010R2 = $1010*(1+.01) = $1020.10R2 = $1000*(1+.01)2 = $1020.10RT = R0*(1+r)T 8-2Projecting Future Dollars

2、 into the PresentHow much will $1000 earned in 2 years at an interest rate of 10% be worth today?Since RT = R0*(1+r)T R0 = RT/(1+r)T Present Valuediscount ratediscount factorLow r more future-oriented and benefits projects in which returns are concentrated further into the futureHigh r more present-

3、oriented and benefits projects in which returns are concentrated closer into the future8-3Present Value of a Stream of MoneyPVRRrRrRrTT0122111()().()8-4InflationPVRRrRrRrTTTT 012222111111111()()()()() ().()() ()How to incorporate inflation price level increases into the procedure? Given: = inflation

4、 rateHowever, (1+) terms cancel out, leaving the PV equation from previous slide!CAUTION: $ values and r values must be measured consistently if real values are used for R, the r must be measured in real terms 8-5Private Sector Project EvaluationPresent Value CriterionTTTrCBrCBrCBCBPV)1 (.)1 (122211

5、00Annual Net ReturnPV of R&D vs. AdvertisingYearR&DAdvertisingr =R&DAdvertising0$1,000-$1,0000$150$200160000.011281652000.05463735501,2000.0710-21Note choice of r is critical: Low r benefits Advertising; High r benefits R&D.8-6Private Sector Project Evaluation Internal Rate of Return0)1 (.)1 (122211

6、00TTTCBCBCBCBPVProjectYear 0Year 1ProfitPVX-$100$11010%$43.77Y-$1,000$1,0808%$2018.87IRR: Discount rate that would make a projects NPV zero This criterion is flawed when comparing projects of much differing sizes. Although X has the higher IRR, Y yields the higher profit. Note that the PV criteria,

7、using r=6%, would prefer Y.8-7Private Sector Project Evaluation Benefit-Cost RatioTTrBrBrBBB)1 (.)1 (12210TTrCrCrCCC)1 (.)1 (12210Benefit-cost ratio = B/C8-8Problems with the Benefit-Cost Ratio“Costs or Negative Benefits?”ProjectBCB/CI$250$1002.5II$200$1002.0Suppose that $40 of costs need to be adde

8、d to project II: Subtract $40 from B?$210$1002.1ORI: Add $40 to C?$250$1401.79Benefit-Cost criterion can lead to incorrect inferences8-9Private Sector Project EvaluationThe Present-Value Criterion is the most reliable evaluation guide Both IRR and Benefit-Cost Ratio Criteria can lead to incorrect in

9、ferences8-10What is the Appropriate Discount Rate for Government Projects Based on Returns in Private Sector: the market rate Social Discount Rate: the rate at which society is willing to trade off present consumption for future consumption Arguments for SDR: Paternalism Market Inefficiency Example:

10、 Discounting and the Economics of Climate Change8-11Government Discounting in Practice U.S. Office of Management and Budget (OMB) requires federal agencies to use a variety of discount rates, depending on the agency and the type of project One using real discount rate of 7% One using real discount r

11、ate of 3% Evidence shows that governments incorrect use of discounting has favored policies that increase revenue in the short run, but reduce it in the long run8-12Valuing Public Benefits and Costs Use Market Prices? Use Adjusted Market Prices in imperfect markets?= Shadow price= underlying social

12、MC of a good Monopoly Taxes Unemployment Use Consumer Surplus?Pounds of avocados per yearPrice per pound of avocadosDaSadA0Sa$1.35$2.89bcgA1e8-13Valuing Public Benefits and CostsInferences from Economic Behavior How to place a value on the time saved by a proposed project like a new highway? Earning

13、s? Other methods How to place a value on a life saved by a proposed project such as a 4-lane divided highway? Lost earnings? Probability of death8-14Valuing Public Benefits and CostsIntangibles Intangibles can subvert cost-benefit exercises C/B tools can reveal limits on valuing intangibles Cost-eff

14、ectiveness analysis might be best in the presence of intangible benefits Comparing the costs of various alternatives that attain similar benefits to determine which one is the cheapest8-15Games Cost-Benefit Analysts PlayCommon Errors The Chain-Reaction Game Including secondary profits (but not costs

15、) The Labor Game Including project workers wages as a benefit (rather than what it is, which is a cost) The Double-Counting Game Including benefits from all possible projects, when only one project can be undertaken8-16Distributional ConsiderationsShould who gains and who loses be taken into account

16、? Should benefits and costs be weighted? NO: Hicks-Kaldor Criterion a project should be undertaken if it has positive net present value, regardless of distributional consequences NO: Let the government costlessly correct any undesirable distributional aspects NO: Relies too much on value judgments a

17、nd politics 8-17UncertaintyProjectBenefitProbabilityCEX$1,0001.00$1,000Y00.50$1,000$2,0000.50Certainty Equivalents (Expected Value)8-18An Application: Are Reductions in Class Size Worth It? Discount rate Costs Benefits The Bottom Line and Evaluation8-19Use (and Nonuse) by Government Using Cost-Benef

18、it Analysis Not Using Cost-Benefit Analysis Clean Air Act Endangered Species Act Food, Drug, and Cosmetic Act8-20Chapter 8 Summary Cost-Benefit analysis is used to evaluate potential public sector projects Present value of future expected costs and benefits must be calculated in order to allow correct comparisons Although the IRR and B-C Ratio are used to evaluate projects, the NPV criterion has fewer biases and problems Choice of the discount rate is critical The costs and benefits of public projects can be measured using marke