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Questions and Answers
What is the primary purpose of the production possibilities model in economic analysis?
What is the primary purpose of the production possibilities model in economic analysis?
Which of the following is NOT one of the assumptions underlying the production possibilities model?
Which of the following is NOT one of the assumptions underlying the production possibilities model?
Which economic concept is best illustrated by the production possibilities curve?
Which economic concept is best illustrated by the production possibilities curve?
What happens to the production possibilities curve when there is economic growth?
What happens to the production possibilities curve when there is economic growth?
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Which of the following best describes the law of demand?
Which of the following best describes the law of demand?
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What is the opportunity cost in decision making?
What is the opportunity cost in decision making?
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What did Ashley decide to pursue after graduation?
What did Ashley decide to pursue after graduation?
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Which alternative did Mary Kate choose after graduation?
Which alternative did Mary Kate choose after graduation?
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What is one of the essential skills mentioned for making optimal decisions?
What is one of the essential skills mentioned for making optimal decisions?
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What can be considered as potential costs of pursuing a Masters degree?
What can be considered as potential costs of pursuing a Masters degree?
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If Ashley and Mary Kate continue on equal career paths, who might come out ahead financially?
If Ashley and Mary Kate continue on equal career paths, who might come out ahead financially?
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What can trade-offs in decision making refer to?
What can trade-offs in decision making refer to?
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Which financial outcome would affect both Ashley and Mary Kate if they lost their jobs?
Which financial outcome would affect both Ashley and Mary Kate if they lost their jobs?
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What is the primary purpose of Cost-Benefit Analysis (CBA)?
What is the primary purpose of Cost-Benefit Analysis (CBA)?
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Which statement best describes the relationship between CBA and financial analysis?
Which statement best describes the relationship between CBA and financial analysis?
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What does ex ante analysis in CBA evaluate?
What does ex ante analysis in CBA evaluate?
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Why is policy intervention sometimes necessary despite optimal market allocations?
Why is policy intervention sometimes necessary despite optimal market allocations?
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Which of the following scenarios illustrates a social cost that may not have financial implications?
Which of the following scenarios illustrates a social cost that may not have financial implications?
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What is the main objective of Cost-Benefit Analysis (CBA)?
What is the main objective of Cost-Benefit Analysis (CBA)?
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What does the First Welfare Theorem state about market outcomes?
What does the First Welfare Theorem state about market outcomes?
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What kind of analysis is conducted after the completion of a project?
What kind of analysis is conducted after the completion of a project?
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Which of the following is NOT a key component of Cost-Benefit Analysis?
Which of the following is NOT a key component of Cost-Benefit Analysis?
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In what way does CBA improve social decision-making?
In what way does CBA improve social decision-making?
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What percentage of the total marks does continuous assessment account for in this course?
What percentage of the total marks does continuous assessment account for in this course?
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What element is crucial for passing the course requirements?
What element is crucial for passing the course requirements?
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Which of the following statements best describes the purpose of CBA in relation to societal welfare?
Which of the following statements best describes the purpose of CBA in relation to societal welfare?
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Which edition of 'Cost‐Benefit Analysis: Concepts and Practice' is mentioned as a reading material?
Which edition of 'Cost‐Benefit Analysis: Concepts and Practice' is mentioned as a reading material?
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Which of the following is a step involved in conducting a CBA?
Which of the following is a step involved in conducting a CBA?
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In the context of Cost-Benefit Analysis, what does the term 'social cost' refer to?
In the context of Cost-Benefit Analysis, what does the term 'social cost' refer to?
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What is the market quantity demanded at a price of $1.00?
What is the market quantity demanded at a price of $1.00?
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If the number of buyers in the market increases, what effect does this have on the demand curve?
If the number of buyers in the market increases, what effect does this have on the demand curve?
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What happens to the demand for a normal good when consumer income increases?
What happens to the demand for a normal good when consumer income increases?
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Which of the following best describes substitute goods?
Which of the following best describes substitute goods?
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At a price of $4.00, what is the total quantity demanded in the market?
At a price of $4.00, what is the total quantity demanded in the market?
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What effect does a decrease in the number of buyers have on the demand curve?
What effect does a decrease in the number of buyers have on the demand curve?
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At a price of $3.00, what does Sam’s quantity demanded equal?
At a price of $3.00, what does Sam’s quantity demanded equal?
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If a good is classified as inferior, what is the expected change in demand when income rises?
If a good is classified as inferior, what is the expected change in demand when income rises?
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What effect does an increase in the price of Coke have on the demand for Pepsi?
What effect does an increase in the price of Coke have on the demand for Pepsi?
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Which of the following pairs of goods are considered complements?
Which of the following pairs of goods are considered complements?
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How does an increase in tastes toward a specific good affect its demand curve?
How does an increase in tastes toward a specific good affect its demand curve?
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What is the likely effect on current demand if people expect an increase in income in the future?
What is the likely effect on current demand if people expect an increase in income in the future?
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If the price of computers rises, what happens to the demand for software?
If the price of computers rises, what happens to the demand for software?
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What happens to the demand curve for music downloads if the price of music CDs falls?
What happens to the demand curve for music downloads if the price of music CDs falls?
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Which scenario represents a non-price determinant of demand affecting the demand curve?
Which scenario represents a non-price determinant of demand affecting the demand curve?
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If a new study shows health benefits of pork, what is the expected effect on the demand for pigs?
If a new study shows health benefits of pork, what is the expected effect on the demand for pigs?
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Study Notes
Course Outline
- Course title: Cost-Benefit Analysis
- Course code: ECON 208
- Level: Undergraduate, Level 200
- Semester: Second Semester, 2023/2024
- Lecturer: Mr. Isaac Appiah Amankwa
- Contact details: (020-844-8719, 024-551-9594) and [email protected]; [email protected]
- Lecture days: Wednesdays
- Lecture time: 2:00 PM - 4:00 PM
Course Objective and Description
- The course aims to equip decision-makers with information on the social value of government programs, projects, and policies.
- This enables allocation of resources to enhance societal well-being.
- Topics include: general overview and concepts, microeconomic underpinnings, valuing benefits and costs, time preference, net present value, and social discount rates.
- Also included in the course are: valuation of impacts, stated preference, shadow pricing, evaluation strategies, risk, uncertainty and real options, as well as distributional issues.
Course Content
- 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
- Upon successful completion, students will be able to describe the key steps involved in a standard cost-benefit analysis.
- Students will be able to explain the economic principles guiding cost-benefit analysis.
- Students will be able to identify all relevant costs and benefits of a particular public policy/project/regulation.
- Students will be able to properly classify all relevant benefits and costs of a project/policy/regulation.
- Critically explain when to attach cedi values to benefits and costs, and how to do so.
- Explain what a social discount rate is.
- Explain where the social discount rate comes from, and why it is important to use an appropriate social discount rate in a cost-benefit analysis.
- Develop a research proposal, conduct research and communicate the results of a mini cost-benefit analysis.
Reading Materials
- Boardman et al. (2018). Cost-Benefit Analysis: Concepts and Practice (5th edition). Prentice-Hall, Upper Saddle River.
- Weimer and Vining (2017). Policy Analysis: Concepts and Practice (6th edition). Taylor & Francis.
- Boardman (2006). Cost-benefit Analysis: Concepts and Practice (3rd edition). Prentice Hall.
- Campbell and Brown (2003). Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets. Cambridge University Press.
Examinations
- The course is assessed through continuous assessment (40%) and a semester examination (60%).
- Continuous assessment includes attendance (10%) and exercises/assignments/quizzes (30%).
- Minimum attendance required: 80%.
Introduction and overview of Cost-Benefit Analysis
- This section introduces key concepts for students: What is CBA?
- Types of CBA Analysis
- The Main Steps of a CBA
- Illustrative Examples
What is Cost-Benefit Analysis (CBA)?
- A policy assessment method that measures the value of policy consequences to all members of society in monetary terms.
- Systematically categorizes the costs and benefits of a policy, project, or program to determine the net benefit to society.
- A quantitative tool to evaluate the worth of a project, programme or policy
- It analyzes the quantification of costs and benefits of a decision, program, or project (over a certain period), and those of its alternatives (over the same period)
What is Cost-Benefit Analysis?
- Tries to consider all costs and benefits to society as a whole.
- Applies to policies, programmes, projects, regulations, demonstrations, and other government interventions.
- Helps policy-makers in answering questions such as:
- Does the proposed project, program or policy provide a net benefit to the community as a whole?
- Should the proposed project, program or policy be undertaken?
- Should the project or program be continued?
- Which of various alternative projects or programme should be undertaken?
What is Cost-Benefit Analysis?
- Facilitates the allocation of resources to their most valuable uses.
- Market outcomes (optimal allocation of resources) can sometimes be achieved through markets that signal the most valued uses
- A competitive market equilibrium is efficient.
Purpose of CBA
- To assess the case for intervention and guide intervention.
- Helps social decision-making and to increase social value, or to improve allocative efficiency.
- Distinct from financial analysis, which mainly focuses on financial outlays and receipts associated with an investment
Example
- Environmental impacts often impose social costs, but their financial implications may be minimal.
- Financial analysis are still needed to ascertain the impacts of a project on government finances.
Types of CBA Analysis
- Ex ante or prospective CBA: Conducted before a decision, identifies a policy or project's potential.
- Ex post or retrospective CBA: Conducted after a policy or project, evaluates the actual impact.
- In medias res CBA: Conducted at any time after a decision to undertake a project, assess continuing it.
The main steps of a CBA
- Explain the purpose of the CBA
- Specify the set of alternative projects
- Decide whose benefits and costs count (specify standing)
- Identify the impact categories, catalogue them, and select metrics
- Predict the impacts quantitatively over the life of the project
- Monetize (attach Cedi values to) all impacts
- Discount benefits and costs to obtain present values
- Compute the net present value of each alternative
- Perform sensitivity analysis
- Make a recommendation
Purpose of the CBA and the specification alternatives
- Answers the question: what is the rationale for considering a change in policy or program?
- Market failures and/or government failures justify interventions, and thus a CBA
- CBA compares one or more potential projects with projects that would be displaced
Decide Whose Benefits and Costs Count (Specify Standing)
- The referent group is the set of people whose costs and benefits count for the purposes of the analysis.
- They have "standing" in legal term.
- Depending on the uncertainty, two perspectives are recommended:
- State perspective: Focusing on the jurisdiction's residents for whom the project is being undertaken.
- Global perspective: Involving all affected people regardless of their location.
Identify the impact categories, catalogue them, and select metrics
- The analyst identifies impacts, categorizes them as benefits or costs, and specifies the metric for each category.
- Impacts are project inputs and outputs: inputs are usually costs (e.g., construction materials), outputs are usually benefits.
- Costs and benefits can be considered.
- Indicators that can be quantified are chosen.
- Experts from various fields are essential.
Adam Smith (1723–1790)
- Known as the father of modern economics.
- Laissez-faire is an economic environment where private transactions are free from tariffs, subsidies and enforced monopolies
Alfred Marshall (1842-1924)
- Economics can be viewed from two perspectives: as a study of wealth and as a study of man
- Wealth is a means to an end - the end being human welfare.
Lionel Robbins (1898–1984)
- Economics is a science that studies human behavior. It focuses on balancing scarce resources with multiple alternative uses.
Paul Samuelson (1915-2009)
- Economics is the study of how people choose to allocate resources. This includes considerations of money or not, the present and the future, and various societal groups.
- Economics has four divisions: production, exchange, distribution, consumption.
Conclusion
- Wealth Definition: Economics as a science of wealth. By Adam Smith (1778)
- Material Welfare Definition: Economics as a science of material welfare. By Alfred Marshall (1890)
- Scarcity and Choice Definition: Economics as a science of scarcity and choice. By Lionel Robbins (1932)
- Development and Growth Definition: Economics as a science of development and growth. By Paul Samuelson
The Economic Problem
- Unlimited wants vs. scarce resources (land, labor, capital)
- Society must decide how to use limited resources effectively.
Scarcity
- The excess of wants exceeding the available resources to satisfy them.
- It affects all societies, not just poor ones.
- Anything with a price is considered scarce.
Factors of Production
- Land: Natural resources (renewable and non-renewable).
- Labor: Physical and mental effort in production.
- Capital: Non-natural resources used in production.
- Enterprise (Entrepreneurship): Management, organization, and planning of the other three factors.
Opportunity Costs
- Cost of the next best alternative.
- Arises from scarcity.
- Essential in decision-making.
Tradeoffs
- Decisions often involve sacrificing one alternative for another.
- Opportunity costs are valuable alternatives given up.
Production Possibility Frontier (PPF)
- A curve showing possible combinations of goods/services a society can produce when using all resources efficiently.
- It separates achievable and unattainable production points.
- Demonstrates scarcity, efficiency, choice, and economic growth.
Positive and Normative Economics
- Positive statements: Factual claims that can be tested.
- Normative statements: Value judgments that cannot be tested.
Discussion Questions
- Role of PPF model in economic analysis
- Assumptions behind PPF model,
- Economic concepts explained by the PPF
- Impact of economic growth on PPF
The Market System of Demand and Supply
- Introduction to demand and supply theory
- Explaining market equilibrium
Demand
- Amount of a good buyers are willing and able to purchase at various prices.
- Law of demand: Other factors being constant, price increases lead to a fall in quantity demanded.
- Inverse relationship between price and quantity demanded.
Representation of price and quantity demanded relationship
- Demand schedule: A tabular representation of price-quantity demanded relationships.
- Demand curve: A graphical representation of the relationship between price and quantity demanded.
- Demand function: An equation used to show the relationship between price and quantity demanded.
Individual Demand vs. Market Demand
- Individual demand: Demand of a single consumer at various prices.
- Market demand: Sum of all individual demands for a good at various prices.
- Market demand curve: Aggregation of individual demand curves horizontally.
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Description
Test your understanding of the production possibilities model in economic analysis. This quiz covers key concepts, assumptions, and implications of the production possibilities curve, as well as the law of demand. Perfect for students looking to reinforce their economic knowledge.
