Cost-Benefit Analysis in ECON 208

Course Outline

• Course: ECON 208
• Semester: Second Semester, 2023/2024
• Level: Undergraduate, Level 200
• Lecturer: Mr. Isaac Appiah Amankwa
• Contact Information: (020-844-8719, 024-551-9594) [email protected]; [email protected]
• Lecture Day: Wednesdays, 2:00 PM - 4:00 PM

Course Objective and Description

• Aims to provide decision-makers with information on the social value of government programs, projects, and policies.
• Enables resource allocation to improve societal well-being.
• Topics include overview and conceptual issues, microeconomic underpinnings, valuing benefits and costs, time preference, net present value, social discount rates, impact valuation, stated preference, shadow pricing, risk and uncertainty, real options, alternative evaluation approaches, and distributional issues.

Course Contents

• Overview of the course
• Introduction and overview of Cost-Benefit Analysis
• Conceptual foundations of Cost-Benefit Analysis
• Identification and Valuation of Costs and Benefits
• Investment Decision Criteria
• The Social Discount Rate
• Cost-Effectiveness Analysis & Distributionally Weighted CBA

Learning Outcomes

• Describe key steps in a standard cost-benefit analysis.
• Explain economic principles guiding cost-benefit analysis.
• Identify relevant costs and benefits of public policies, projects, and regulations.
• Properly classify relevant project/policy/regulation benefits and costs.
• Critically explain when to attach cedi values to benefits and costs.
• Explain social discount rates, source, and importance in cost-benefit analysis.
• Develop research proposals, conduct research, and communicate mini cost-benefit analysis results.

Reading Materials

• Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2018). Cost-Benefit Analysis: Concepts and Practice (5th edition). Prentice-Hall, Upper Saddle River.
• Weimer, D., & Vining, A. (2017). Policy Analysis: Concepts and Practice (6th edition). Taylor & Francis.
• Boardman, N. E. (2006). Cost-benefit Analysis: Concepts and Practice (3rd edition). Prentice Hall.
• Campbell, N., & Brown, R. (2003). Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets. Cambridge University Press.

Examinations

• Continuous assessment (40%): Class attendance and participation (10%), and assessed class exercises/assignments/quizzes/mid-semester exam (30%).
• End-of-semester examination (60%).
• Minimum attendance required: 80%.

Introduction and Overview of Cost-Benefit Analysis

• What is Cost-Benefit Analysis? A quantitative tool to determine the worth of a project, program, or policy.
• Types of CBA Analysis: Ex ante (prospective), ex post (retrospective), and in medias res (post-decision)
• Main Steps of a CBA: Detail the purpose, specify alternatives, define whose benefits and costs count, categorize and select metrics for impacts, quantify and monetize impacts, derive present values through discounting, calculate net present value, perform sensitivity analysis, and make recommendations.
• Illustrative Examples:
  • Environmental impacts (social costs but often little to no financial implications).
  • Government funding of projects (outlays funded by taxes).

What is Cost-Benefit Analysis (CBA)?

• A method to quantify the value of all consequences of a policy to all members of society.
• Systematically categorizes the costs and benefits to society, not just individuals.
• A quantitative tool used for assessing worth of projects, schemes, and policies.

CBA Purpose and Rationale

• To assess intervention cases and guide interventions.
• Helps in social decision-making and to improve allocative efficiency.

Types of CBA Analysis

• Ex Ante: Conducted before a decision is made to determine the feasibility.
• Ex Post: Conducted after a policy or project is completed to determine the effectiveness.
• In Medias Res: Conducted after the decision to undertake a project, but before its completion.

The Main Steps of a CBA

• Explain the CBA purpose.
• Specify the set of alternative projects (including the "counterfactual" — the displaced project)
• Establish whose benefits and costs should be considered (e.g., local residents, all citizens).
• Identify impact categories.
• Quantify impacts over the life of the project.
• Monetize impacts (assign values to them).
• Discount benefits and costs to obtain present values.
• Calculate the net present value of each alternative.
• Conduct sensitivity analysis.
• Present a recommendation.

Decision-Making and Opportunity Cost

• Decisions involve tradeoffs.
• The opportunity cost is the highest-valued alternative forgone.
• Researching this cost is useful in making a satisfactory decision.

Production Possibility Frontier

• A curve illustrating different combinations of goods and services producible given resources.
• Illustrates possible production combinations that are efficient or unattainable from the limited resources available
• Demonstrates concepts like efficiency, scarcity, choice, economic growth, and opportunity cost.

Positive & Normative Economics

• Positive Statements: Describe facts, quantifiable and verifiable.
• Normative Statements: Express values or judgments, subjective and not testable.

Discussion Questions

• Role of the production possibilities model in economic analysis.
• Assumptions of the production possibilities model.
• Economic concepts illustrated by the production possibilities curve.
• Impact of economic growth on the production possibilities curve/frontier.

Demand and Supply

• Demand: Willingness and ability of buyers to purchase goods, negatively correlated with prices.

• Law of Demand: Other things constant, price rise causes quantity demanded to fall & vice versa.

• Demand Curve: Graphic representation of price and quantity demanded.

• Market Demand: Combined demand of all individual consumers.

• Demand Curve Shifters (Non-price Determinants):

• Number of buyers

• Income (normal/inferior goods)

• Prices of related goods (substitutes/complements)

• Tastes

• Expectations

• Further Non-Price Determinants of Demand

• Movement along the Demand Curve vs. Shift in the Demand Curve.