Lecture9 - Risk Assessment and Management Lecture 9:...

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1 Risk Assessment and Management Lecture 9: Benefit Cost Analysis Reading Material of the Week s Kelman, Cost-Benefit Analysis: An Ethical Critique (Will be distributed in class)
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2 What is Benefit-Cost Analysis? Technique used in many public decisions to attempt to decide if a project should be funded. Example 1 Are the benefits from building and operating a dam for water- supply, irrigation and recreation in excess of the costs of building the dam, the cost of removing the land from other uses, and the cost of foregoing the use of the water if it were not regulated? What is Benefit-Cost Analysis? Example 2 Are the costs to improve a section of highway less than the benefits from reduced travel time, less wear and tear on equipment, and expected costs of accidents (damage to vehicles, medical expenses, lost wages from time lost from work etc.)? Example 3 Are the costs to bring buildings up to new earthquake codes less than the expected benefits including the expected avoided damages to buildings and their contents, as well as the expected benefits assigned to avoided injuries and deaths?
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3 What is Benefit-Cost Analysis? Example 4 Are the benefits (decreases in deaths and injuries) resulting from government safety regulations sufficient to justify the costs. Pure Benefit-Cost Analysis • Assign monetary values to costs • Assign monetary values to benefits even if there are not market prices as is the case with injuries, deaths, existing social relationships, clean air, birds/fish, and environmental considerations • Appropriately discount both benefits and costs to capture social time preferences
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4 Pure Benefit-Cost Analysis To get an answer, require that: • Benefits/Costs >2? • Benefits-Costs >0? • Pick project with greatest Benefit Cost ration: Benefits/Costs • Pick project with greatest Net Benefits: Benefits-Costs • Pick projects with greatest rate of return, or discount rate r: Benefit(r) - Cost(r)=0 What is the objective of Benefit-Cost Analysis? • Tell us what projects are right or best?
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Lecture9 - Risk Assessment and Management Lecture 9:...

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