COST BENEFIT ANALYSIS & PROJECT
EVALUATION
Social CBA
References: Chapter 8 & 9, Social CBA and Economic Evaluation.
1. Identify economic efficiency and its challenges in practical
applications.
2.Understand the role of shadow prices for economic efficiency in CBA.
3. Identify and utilise relevant shadow prices using adjusted observed
prices in distorted markets.
4.Demonstrate the difference between corrective and distortionary
taxes/subsidies.
5.Describe the distribution of costs and benefits from the social CBA.
6.Calculate the benefits and costs for those with standing in a CBA.
Learning Objectives
2
Social perspective is harder to implement in CBA.
Social benefits and social costs are harder to calculate.
- Market prices often do not capture the social benefit and social costs associated with
production or consumption of a good.
So why does economics focus on perfectly competitive markets? Especially because
perfectly competitive markets are few and far between in the real world?
Benchmark – identification of socially improving policies (week 5)
Social Perspective in CBA.
3
Undistorted Market
4
Quantity
Price
S = MSC
P*
Q*
D = MSB
equilibrium
Producer
Surplus
Consumer
Surplus
MSB=MSC
What if the market was
distorted? How do we choose
the correct shadow price?
In competitive market equilibrium there is only one price as determined by the intersection
of supply and demand curves
When markets are distorted there are two prices - one reflecting demand conditions (Pb)
and one reflecting supply conditions (Ps).
Shadow - pricing - adjusting observed market prices to reflect marginal benefit or cost to
economy in CBA evaluations.
Shadow Pricing in Social CBA - The CBA analyst has to decide whether Pb or Ps is the
appropriate price to value output or input in the CBA.
Shadow Pricing Decisions
5
1.Monopoly
2.Distortive Taxes
3.Distortive Subsidies
4.Information Asymmetries
5.Public Goods
6.Externalities
7.Corrective Taxes and Subsidies
8.Monopsony
9.Labour Markets with Minimum Wages
Types of Distorted Markets
6
Output markets:
- If the intervention causes the availability of the output to increase – use WTP
- If the intervention decreases the availability of the output for use by others to (diverting use) –
use OC
Input Markets:
- If the intervention causes the availability of the input to increases – OC
- If the intervention decreases availability of the input for use by others (diverting use) - WTP
Remember it is key to identify if it is an input or an output market under evaluation!
General Rules
7
Material Inputs with Indirect Tax
8
In a perfectly competitive
market we would face supply
curve S and demand curve D.
Equilibrium Price and Quantity
would be P1 and Q1
respectively
Implementing an ad valorem
(proportional tax) decreases
the supply to Stax
Quantity
MEB = Subsidy
MSB
Identify economic efficiency and its challenges in practical
applications.
Understand the role of shadow prices for economic efficiency in CBA.
Identify and utilise relevant shadow prices using adjusted observed
prices in distorted markets.
Demonstrate the difference between corrective and distortionary
taxes/subsidies.
Describe the distribution of costs and benefits from the social CBA.
Calculate the benefits and costs for those with standing in a CBA.
Learning Objectives
31
Case Study Worked Example on Solar Farms
For students who are looking for more practice questions – refer to the online textbook activities.
Putting it into Practice!