CBA_overview - Welfare economics and the theory of...

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Welfare economics and the theory of cost-benefit analysis A. CBA vs. CEA B. WTP vs. QALYs C. D. Measuring WTP
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Basic idea: A program (compared to some alternative) is attractive if and only if the beneficiaries’ willingness to pay (WTP) for the benefits exceeds the costs (i.e. iff WTP for incremental benefit > incremental costs) If multiple mutually exclusive programs are available, the program with the highest net benefit [NB = (WTP for benefits) – costs] is chosen
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Health effects are measured differently: CEA: QALYs CBA: WTP ($) Many people don’t like CBA simply because it measures health gains in monetary units “It doesn’t feel right…”
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But: To make resource allocation decisions in CEA, we need to end up choosing a threshold CE ratio, which represents our willingness to pay for health gains So: Why object to CBA, since CEA also requires WTP? Good question! Why bother with CBA, if CEA already incorporates WTP? Sometimes there are good reasons . .
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Why use WTP rather than QALYs? The benefits of some programs are easier to measure in terms of WTP rather than QALYs Example: The value of environmental clean-up following oil spills The Exxon Valdez oil spill marked a major turning point in the field of CBA – opposing sides argued vehemently [actually, paid big- name economists tons of money to argue for them] over whether it
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CBA_overview - Welfare economics and the theory of...

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