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Time savings are a clear example in the field of transportation projects. Determining the unit of analysis and its monetary value is not an easy exercise for many intangible variables such as quality of life, security of a neighbourhood. One alternative to determine its monetary value is to assess the highest price an individual is willing to agree to pay for a good or a service.

Principles of Cost Benefit Analysis

As described by Breidert [23] :. These two values determine whether the price a person is willing to accept is the reservation price or the maximum price. If a person believes that there is no alternative offering, the highest amount of money he or she is willingness to pay equals the utility of the good and is the reservation price. If a person perceives an alternative offering with an economic value below utility, the highest price he or she would accept equals the economic value of the product and is the maximum price. Where it is difficult to determine the monetary value of a benefit, it can be useful to consider values from studies in other countries, although care is necessary in interpreting these as the value for example, willingness to pay in one country may be different from another.

If it is decided not to quantify a specific benefit, the benefit should be treated qualitatively and considered or included in the analysis in addition to the quantitative results. In this case, even when it is not possible to express all of the benefits or costs in quantitative terms, it is possible to reveal important aspects for decision-makers. The first act is to demonstrate social and economic benefits in quantitative terms.

Table 3. Implicit or contingent valuation using survey data or other techniques. Depreciation plus interest on un-depreciated part or annualized cost of depreciation and interest. Once the direct costs are duly adjusted and the externalities external costs and benefits are identified and quantified, a number of additional adjustments should be made before the results of the analysis are calculated and presented.

In Evaluation and Program Planning 32 52— Cost Benefit Analysis. In Encyclopedia of Social Measurement, Volume 1 , pages Issue 7 — October Published by Elsevier Ltd. Dispatched from the UK in 2 business days When will my order arrive? Home Contact us Help Free delivery worldwide. Free delivery worldwide. Bestselling Series.

Applied Economics - Cost–Benefit

Harry Potter. Popular Features. New Releases. Description This fully updated new edition continues in the vein of its predecessor by viewing cost-benefit analysis as applied welfare economics, while at the same time building on the earlier framework by extending the theory and providing further applications in each chapter. Presented in an integrated manner, the theoretical concepts are constructed around the main building blocks of CBA, such as shadow pricing, distribution weights, the social discount rate and the marginal cost of public funds.

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This edition will cement the book's place as a major and accessible text in the field and will be of great interest to graduate and undergraduate students of welfare economics and microeconomic theory, as well as government economists involved with any area of public policy. A dollar available five years from now is not as good as a dollar available now. This is because a dollar available now can be invested and earn interest for five years and would be worth more than a dollar in five years.

This called the discounted value or present value of a dollar available t years in the future. When the dollar value of benefits at some time in the future is multiplied by the discounted value of one dollar at that time in the future the result is discounted present value of that benefit of the project. The same thing applies to costs. The net benefit of the projects is just the sum of the present value of the benefits less the present value of the costs. The choice of the appropriate interest rate to use for the discounting is a separate issue that will be treated later in this paper.

For example, improvements in transportation frequently involve saving time. The question is how to measure the money value of that time saved. The value should not be merely what transportation planners think time should be worth or even what people say their time is worth. The value of time should be that which the public reveals their time is worth through choices involving tradeoffs between time and money. If people have a choice of parking close to their destination for a fee of 50 cents or parking farther away and spending 5 minutes more walking and they always choose to spend the money and save the time and effort then they have revealed that their time is more valuable to them than 10 cents per minute.

If they were indifferent between the two choices they would have revealed that the value of their time to them was exactly 10 cents per minute.

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  • The most challenging part of CBA is finding past choices which reveal the tradeoffs and equivalencies in preferences. For example, the valuation of the benefit of cleaner air could be established by finding how much less people paid for housing in more polluted areas which otherwise was identical in characteristics and location to housing in less polluted areas.

    Generally the value of cleaner air to people as revealed by the hard market choices seems to be less than their rhetorical valuation of clean air. Benefits Are Usually Measured by Market Choices When consumers make purchases at market prices they reveal that the things they buy are at least as beneficial to them as the money they relinquish.

    Applied Cost–Benefit Analysis

    Consumers will increase their consumption of any commodity up to the point where the benefit of an additional unit marginal benefit is equal to the marginal cost to them of that unit, the market price. Therefore for any consumer buying some of a commodity, the marginal benefit is equal to the market price. The marginal benefit will decline with the amount consumed just as the market price has to decline to get consumers to consume a greater quantity of the commodity.

    The relationship between the market price and the quantity consumed is called the demand schedule. Thus the demand schedule provides the information about marginal benefit that is needed to place a money value on an increase in consumption. Gross Benefits of an Increase in Consumption is an Area Under the Demand Curve The increase in benefits resulting from an increase in consumption is the sum of the marginal benefit times each incremental increase in consumption.

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    As the incremental increases considered are taken as smaller and smaller the sum goes to the area under the marginal benefit curve. But the marginal benefit curve is the same as the demand curve so the increase in benefits is the area under the demand curve.

    As shown in Figure 1 the area is over the range from the lower limit of consumption before the increase to consumption after the increase. Figure 1 When the increase in consumption is small compared to the total consumption the gross benefit is adequately approximated, as is shown in a welfare analysis , by the market value of the increased consumption; i.

    There is considerable antipathy in the general public to the idea of placing a dollar value on human life. Economists recognize that it is impossible to fund every project which promises to save a human life and that some rational basis is needed to select which projects are approved and which are turned down. The controversy is defused when it is recognized that the benefit of such projects is in reducing the risk of death. There are many cases in which people voluntarily accept increased risks in return for higher pay, such as in the oil fields or mining, or for time savings in higher speed in automobile travel.

    These choices can be used to estimate the personal cost people place on increased risk and thus the value to them of reduced risk.

    This computation is equivalent to placing an economic value on the expected number of lives saved. The Analysis of a Project Should Involve a With Versus Without Comparison The impact of a project is the difference between what the situation in the study area would be with and without the project. This that when a project is being evaluated the analysis must estimate not only what the situation would be with the project but also what it would be without the project. For example, in determining the impact of a fixed guideway rapid transit system such as the Bay Area Rapid Transit BART in the San Francisco Bay Area the number of rides that would have been taken on an expansion of the bus system should be deducted from the rides provided by BART and likewise the additional costs of such an expanded bus system would be deducted from the costs of BART.

    In other words, the alternative to the project must be explicitly specified and considered in the evaluation of the project. Note that the with-and-without comparison is not the same as a before-and-after comparison.