Social Cost Benefit Analysis
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Transcript of Social Cost Benefit Analysis
Social Cost Benefit Analysis
SCBA also called economic analysis, is a methodology developed for evaluating investment projects from the point of view of the society as a whole.
Used primarily for public investment SCBA aids in evaluating individual projects Spell out broad national economic objectives Allocation of resources to various sectors SCBA is concerned with tactical decision
making within the framework of broad strategic choices defined by planning at the macro level.
Evaluation on the Basis of Benefits
Benefits refers to the addition to the flow of national output occurring from a project. Real & Nominal Benefits Direct & Indirect Benefits Tangible & Intangible Benefits
Evaluation on the Basis of Costs
Project CostAssociated CostsReal & Nominal CostsPrimary or Direct Costs Indirect or Secondary Costs
Rationale for SCBA
In SCBA the focus is on the social costs & benefits of the project. These often tend to differ from the monetary costs & benefits of the project.
The principles sources of discrepancy are: Market Imperfection Externalities Taxes & Subsidies Concern for Savings Concern for redistribution Merit Wants
Principles Sources Of Discrepancy (Details)
MARKET IMPERFECTION: Market prices reflect social values only under condition of perfect competition which are really realized in developing countries.
COMMON SOURCES OF MARKET IMPERFECTION IN DEVELOPING COUNTRY
Rationing Prescription of minimum wage rates Foreign exchange regulation.
Approaches of SCBA
Two principle approach for SCBA:UNIDO ApproachLittle-Mirrlees Approach
UNIDO Approach
UNIDO method involves five stages:1. Calculation of financial profitability
measured at market prices
2. Obtaining the net benefit of the project measured in terms of economic (effective) prices
3. Adjustment for the impact of the project on savings & investment
4. Adjustment for the impact of the project on income distribution
5. Adjustment for the impact of the project on merit goods & demerit goods
Net Benefit in Terms of Economic (Efficiency) Prices
Also referred to as shadow pricesMarket prices represent shadow
prices only under conditions of perfect markets
So, shadow prices need to be developed & economic benefit need to be measured in terms of these prices
Shadow Pricing
Choice of Numeraire The unit of account in which the value of
inputs or outputs is expressed– What unit of currency (domestic or foreign)?– Current values or constant values?– With reference to which point- present or future?– In terms of consumption or investment?– With reference to which group?
UNIDO Numeraire: “ net present consumption in the hands of people at the base level of consumption in the private sector in terms of constant in domestic accounting unit.
Concept of Tradability
For tradable goods, the international price is a measure of its opportunity cost to the country– Substitute import for domestic production & vice
versa– Substitute export for domestic consumption & vice
versa
Hence, the international price, also referred to as the border price, represent the ‘real’ value of the good in terms of economic efficiency
Sources of Shadow Prices
UNIDO approach suggests three sources of shadow pricing:
1. Increase or decrease the total consumption in the economy
2. Decrease or increase production in the economy
3. Increase or decrease export or import
Shadow Pricing Measurement
Sources of Shadow Pricing
Basis of shadow pricing
Increase/ decrease of consumption
Consumer Willingness to pay
Increase/ Decrease of production
Cost of production
Increase / Decrease of export / import
Foreign exchange value
Types of Project Product
Non tradable input & outputs: When import price is greater than its domestic cost of production & export price is less than its domestic cost of production.
Tradable inputs & outputsExternalities
Externalities
Characteristics It is not deliberately created by the project
sponsor but is an incidental outcome of legitimate economic activity
It is beyond the control of the persons who are affected by it, for better or for worse
It is not traded in the market
Externalities
Examples of Beneficial External Effect: An oil company drilling in its own fields
may generate improve the transport system in that area
The approach roads built by a company may improve the transport system in that area
The training program of a firm may upgrade the skills of its workers thereby enhancing their earning power
Externalities
Can be measured by indirect means: What the neighboring oil fields would have
spent to obtain the information The value of better transport may be
estimated in terms of increased activities & benefits derived from these
Benefit from the training program may be estimated in terms of the increased earning power of workers
Example of Harmful external Effect
A factory may cause environmental pollution & people living adjacent to it may be exposed to health hazards
Airport in a certain area may raise noise level considerably in the neighborhood
A highway may cut a farmer’s holding in two adversely affecting his physical output
Harmful external Effect
Can be measured by indirect mean:Cost of pollution in terms of loss of
earnings as a result of damage to health & cost of time spent for coping
Cost of noise from difference in rentEffect of highway on consumer willingness
to pay for output
Measurement of the Impact on Distribution
Groups
UNIDO approach seeks to identify income gains & losses by the followings:
Project Other private business Govt. Workers Consumers External sector
Measure of Gain or Loss
Difference between the shadow price & the market price of each input or output
Savings Impact & its Value
UNIDO method seeks to answer the following questions:
Given the income distribution impact of the project what would be its effects on savings?
What is the value of such savings to the society?
Impact on savings
=i i∑∆Y MPS
Where i ∆ Y= change in income of group i due to the project
i MPS= marginal propensity to save of group i
Income Distribution Impact
Can be determined directly by the planner For different income groups relative weights
can be assigned Using “elasticity of marginal utility of income
wi=(b/Ci)n
Where Wi = Weight attached to income at Ci level
b= base level of income that has a weight of I
n = elasticity of the marginal utility of income
Adjustment for Merit & Demerit Goods
Adjusting for the difference between social value & economic value– Estimate the economic value– Calculate the adjustment factor as the difference
between the ratio of social value to economic utility
– Multiply the economic value by the adjustment factor to obtain the adjustment
– Add the adjustment to the net present value of the project