Efficiency Benefit-Cost Analysis

BENEFIT­COST ANALYSIS Financial and Economic Appraisal using Spreadsheets Ch. 5: Efficiency Benefit-Cost Analysis © Harry Campbell & Richard Brown School of Economics The University of Queensland 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. Figure 1.1: The “With and Without” Approach toCost-BenefitAnalysis Decision Undertake the Project Scarce Resources Allocated to the Project Value of Project Output Project Benefit = $X Do not Undertake the Project Scarce Resources Allocated to Alternative Uses Value of Outputfrom Resources in Alternative Uses Project Opportunity Cost = $Y If X>Y, recommend the project In measuring project benefit ($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. ... - tailieumienphi.vn