5.C - Public Sector Projects

5.C - Public Sector Projects - Engineering Economics ECO...

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Engineering Economics ECO 1192 Lecture 5C: Public Sector Projects Claude Théoret University of Ottawa
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 2 Recommended Readings Fraser et al.* chapter 10 Newnan et al. chapter 16
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 3 Lecture Content Market Failure Government Role Cost-Benefit Analysis (CBA) Private and Public Sector Major Steps of CBA Benefits and costs included? Decision Rules CBA and Independent Projects CBA and Mutually Exclusive Projects
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 4 Public Sector Projects WHY? Failure of private markets to allocate economic resources efficiently CAUSES OF PRIVATE MARKET FAILURE 1. External (third party) effects in consumption and/or production (e.g., pollution in the production of some goods) 2. Market power (control over the price of a good or service) 3. Public goods (e.g., national defense) free-rider problem; some persons consume goods/services without paying for them because it is technologically impossible (or too costly) to exclude them. 4. Asymmetric information: buyers and sellers do not have the same information on a good or service (for example, the seller of a used car usually has more information than the buyer) 5. Taxes and subsidies
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 5 Government Action To Address Private Market Failure Regulation pollution emission standards Distribution of marketable permits Corrective taxes Production of goods or services Provision of incentives to reduce negative external effects subsidies for pollution-reducing equipment
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 6 Potential Applications of Cost-Benefit Analysis (CBA) Replace ferry by bridge or tunnel? Nuclear, solar or wind-tunnel power generation? Four- or five-day school week? Two-lane now versus three-lane bridge later? Portable versus regular school classrooms? Residential potable water metering? ………….
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 7 What is Cost-Benefit Analysis (CBA)? Policy/program/project assessment method that quantifies the value of policy consequences (usually called impacts) in monetary terms to all members of society calculates net social benefits (social benefits minus social costs) for each policy alternative Tool for helping to make public decisions—what programs and policies to introduce—done from the standpoint of society rather than from that of a single profit-making firm Methods and techniques for evaluating the social consequences of economic phenomena, policies and projects. Systematic methodology for measuring the benefits and costs of government programs to the population.
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ECO 1192A -- Fall 2009 5C: Public Sector Projects 8 Brief History Used as early as 1900 by the U.S. Army Corps of Engineers to evaluate the desirability of alternative water resource projects.
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This note was uploaded on 06/24/2010 for the course FIR 4440 taught by Professor Moore during the Spring '08 term at U. Memphis.

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5.C - Public Sector Projects - Engineering Economics ECO...

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