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Unformatted text preview: Chapter 16: Economic Analysis in the Public Sector 16-1 Public decision-making involves the use of public money and resources to fund public projects. Often there are those who are advocating for particular projects, those who oppose projects, those who will be immediately affected by such project, and those who may be affected in the future. There are those who represent their own stated interests, and those who are representing others interests. Thus the multi-actor aspect of the phrase refers to the varied and wide group of stakeholders who are involved with, affected by, or place some concern on the decision process. 16-2 Public decision-making is focused on promoting the general welfare of the aggregate public. There is an explicit recognition in promoting the good of the whole, in some cases, that individuals goals must be subordinate (e.g. eminent domain). Private decision making, on the other hand, is generally focused on increasing stakeholder wealth or investment. This is not to say that private decision-making is entirely focuses on financials, clearly private decision-making focuses on non-monetary issues. However, the goal and objective of the enterprise is economic survival and growth and thus the primary objective is financial in nature (for without success financially all other objectives are moot is the firm dissolves). 16-3 The general suggestion is that the viewpoint should be at least as broad as those who pay the costs and/or receive the benefits. This approach balances local decisions, which may sub-optimize decision making if not taken. Example 16-1 describes this dilemma for a municipal project funded partly by federal money (50%). In this example, it still made sense to approve the project from the municipalitys viewpoint but not the federal government, after the benefit estimate was revised. 16-4 This phrase refers to the fact that most benefits are confined locally for government investments. As the authors state, Other than investments in defense and social programs, most benefits provided by government are realized at the local or regional levels. This is true for projects funded with full or partial government money. The conflict arises when some regions, states, municipalities perceive that they are consistently passed over for projects that would benefit their region, state, municipality. Powerful members in congress, and state legislatures, with key committee/subcommittee appointments can influence government spending in their districts. Politics have an effect in this regard. However, many projects, including the US parks system, the interstate highway, and others reach many beyond even regional levels. 16-5 Students will pull elements from the discussion of this topic in the textbook. In the text the concepts discussed include (1) No Time Value of Money, (2) Cost of Capital, and (3) Opportunity Cost. The Recommended Concept is to select the largest of the cost of capital, the government opportunity cost, or the taxpayer opportunity cost.the government opportunity cost, or the taxpayer opportunity cost....
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This note was uploaded on 08/13/2010 for the course IME IME 314 taught by Professor Freeman during the Spring '10 term at Cal Poly.
- Spring '10