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Econ+157+Topic+A+CBA+CEA - Econ 157 Topic A COST BENEFIT...

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COST BENEFIT ANALYSIS AND COST EFFECTIVENESS ANALYSIS Econ 157 Topic A 1/25/2010 1 Econ 157 Mortimer
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Overview Cost-Benefit Analysis Discounting Valuing Human Life Cost-Effectiveness Analysis Cost-Utility Analysis and QALYs Marginal Costs per Life Saved 1/25/2010 2 Econ 157 Mortimer
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Cost Benefit Analysis Overview CBA measures the benefits and costs of projects in monetary terms. Projects are worthwhile if B-C >0. Projects are ranked based on the benefit to cost ratio, B/C. B and C should include private and social benefits and costs (hard to measure). 1/25/2010 3 Econ 157 Mortimer Project I Project II Project III Benefits 2 8 3.5 Cost 1 5 5 B/C ratio 2 1.6 0.7 Should we proceed? Yes Yes No
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Cost Benefit Analysis Marginal Analysis MSB = marginal social benefits Additional health benefits from reducing one unit of air pollution MSC = marginal social costs Additional cost of removing one unit of air pollution Social welfare is maximized at Q*, where MSB = MSC. CBA can be used to evaluate a project that increases the reduction level from Q’ to Q *. 1/25/2010 Econ 157 Mortimer 4 Q P Q’ Q*
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Cost Benefit Analysis - Discounting 1/25/2010 Econ 157 Mortimer 5 Many public projects incur costs immediately but have benefits that occur well into the future.
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