These include: Immediate and controllable costs/benefits; ouDiscount rate (or factor) adjusts future dollars to current The choice of rate has a profound impact on the results.Greatest net benefit = B - CB/C ratio > 1 (efficiency)Not concerned about other possible goals like equity and demPLS 304 – Introduction to Public Policy Analysis Mark T. Imperial, Ph.D. Topic: Cost-Benefit Analysis  Some Basic Terms and Concepts − Efficiency is measured in economic terms and focuses on ensuring that the benefits to be gained in the use of resources (costs) are maximized. For example, dollars cost/unit of output. − Cost/benefit analysis is a common tool for measuring efficiency. − Evaluating costs and benefits is central to policy analysis because efficiency is a way of justifying government action on the basis of economic concepts − Alternatively, when the costs are greater than the benefits, the possible alternative uses of labor, capital, and materials are foregone, depriving society of their value − Benefit-cost analysis is the systematic analysis of the value of the benefits and costs of an alternative. It is a way to compare the efficiency of alternative courses of action that may have different goals and objectives. − The ratio of benefits to costs is a measure of efficiency. In general, you would not proceed unless the ratio of benefits to costs is greater than 1. − All cost-benefit techniques are generally designed to assist a decisionmaker in choosing among alternative policies or projects. It is simply a more sophisticated and systematic way of looking at the advantages and disadvantages or pros and cons of a project − Steps in cost-benefit analysis − Define the goals of the project: − Identification of some feasible alternatives − Make an exhaustive list of all benefits and costs in monetary terms − Estimate and express benefits and costs in monetary terms − Forecast future streams of costs and benefits when needed − Choose the alternative with the largest benefit in comparison to the cost using some decision criterion – b-c ratio > 1 or greatest net benefits − Fundamental principles are: − When considering a single project, accept it if its benefits are greater than the costs − When considering alternative projects, choose the one that gives you the highest benefits in relation to costs  Key Elements in Preparing a Benefit-Cost Analysis − Determine boundaries for the analysis − Must determine what to include and exclude. An examination of the goal(s) of the project may help in this regard. This includes the geographic area covered by the analysis as well as the individuals/groups included. − When conducting a c-b analysis for a public entity you typically include positive and negative externalities. However, if you are conducting the analysis for a private entity you might not include them since they are neither rewarded for their inclusion nor punished for their exclusion. - 1 -PLS 304 – Lecture Notes C-B Analysis − Standing refers to who is to be considered when costs and benefits are computed. In other words, who has a right to be included in the set of individuals or groups whose changes in utility or welfare are counted. − Determining the boundaries of a cost-benefit analysis will often influence the results − For example, if we are doing a c-b analysis for a new bridge over the Cape Fear River, what should the geographic area be for the analysis? − It is really a contextual decision and when there is doubt, you should do the analysis in a variety of ways with different definitions on standing (i.e., perform a sensitivity analysis) − Measure all of the applicable costs and benefits. This includes direct and indirect costs and benefits. − This is not always easy, particularly when they must be expressed in dollar terms. In many cases determining what benefits and costs are important enough to include is a judgment call. − Try to make as exhaustive a list as possible − Direct costs/benefits: those that are closely related to the main objectives of the project − These include: Immediate and controllable costs/benefits; out of pocket costs; revenue streams resulting from the project; opportunity costs of the forgone benefits attached to options not chosen; cost savings from elimination of inefficiencies. − Indirect costs and benefits: the costs associated with impacts or consequences of a policy, program, or project on the surrounding community (Externalities/Spillovers) but they do not show up in the ledger of the project − These by products of a project or program are often more difficult to measure. − They include: intended and unintended opportunity costs and risks; Second order savings and costs resulting from the program/project; externalities attributable to the project; and multiplier effects. − For example, building a new parking garage has costs in materials and operation and maintenance (direct cost). After its construction it might also increase traffic in surrounding neighborhoods (indirect cost) − In practice, it is not always easy to distinguish between direct and indirect costs. A key is what was the legislative intent of the policy or program − Opportunity cost: the resources diverted from other uses to make a given policy, program, or project possible. In other words, the difference between the value of goods and services in a proposed project and their value if they were used in some alternative way. They include monetarizable and nonmonetarizable and tangible and intangible costs − Sunk costs: they are costs associated with resources already built or paid for. They don’t get included in the analysis. For example, if you propose expanding a bridge, you don’t include the cost of the bridge already built. − Side-payment exclusions are the transactions associated with programs or projects that involve no net benefit or cost. They don’t get included in the analysis. - 2 -PLS 304 – Lecture Notes C-B Analysis − For example, a cost-benefit analysis typically excludes the sale of land whose value is enhanced or diminished because of a project because you would otherwise be counting the value twice. − Pitfalls when dealing with costs and benefits − Ignoring costs all together or counting only a portion of total program costs or benefits − Ignoring costs and benefits if they