lecture12 - Applied Welfare Economics Part IIB: Paper 1 Dr...

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Applied Welfare Economics Part IIB: Paper 1 Dr Toke Aidt Lecture 12 Social Cost Benefit Analysis
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Introduction The purpose of social cost benefit analysis (SCBA) is to provide a consistent procedure for evaluating decisions in terms of their welfare consequences . Develop systematic methods for evaluating the costs and benefits of policies or projects when market prices need not fully reflect social costs and benefits.
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Introduction Tax policy : Can the tax system be improved? Green tax reform and commodity tax reform Congestion charge Expenditure policy : How should the revenue be spent? On programmes (education, health etc.) On investments (infrastructure, roads, rail etc.) Project evaluation : Selection between specific publicly funded projects: Move A30 to avoid Stonehenge versus extra lane on A14? Provide a free electrocardiogram screening for heart disease for 40 year olds?
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Introduction SCBA is widely applicable and should be used to justify government intervention from an ex ante point of view. Government departments in the UK and other countries use it. The Green Book. International aid organisations (e.g., the World Bank) use it. Manuals such as the Little-Mirrlees manual prepared for LDCs.
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Outline of this lecture A basic framework Shadow prices and market prices Application to a development project
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Opportunity cost The cost related to the next-best choice available to someone who has picked among several mutually exclusive choices.
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Opportunity cost You won a free ticket to see an Eric Clapton concert (which has no resale value). Bob Dylan is performing on the same night and is your next- best alternative activity. Tickets to see Dylan cost $40. On any given day, you would be willing to pay up to $50 to see Dylan. Assume there are no other costs of seeing either performer. Based on this information, what is the opportunity cost of seeing Eric Clapton? (a) $0, (b) $10, (c) $40, or (d) $50.
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Benchmark Framework Many (identical) consumers, h=1,…H . Two goods x 1 and x 2 traded in competitive markets at consumer prices q=(q 1 ,q 2 ) and producer prices p=(p 1 ,p 2 ) . The two goods are produced with labour ( l 0 ) and capital ( k ) (not necessarily constant returns to scale): Inputs are traded in competitive markets at producer prices p 0 and p k . The aggregate supply of the two factors is fixed. ) , ( ) , ( 2 2 0 2 2 1 1 0 1 1 k l F x k l F x = =
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Benchmark framework The direct utility function of a representative consumer is U(x 1 ,x 2 ) and the budget constraint is q 1 x 1 +q 2 x 2 =m where m is given income (including any untaxed profit income ( π ) and government transfers ( T )).
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This note was uploaded on 06/04/2011 for the course ECONOMICS paper 1 taught by Professor Aidt during the Spring '11 term at Cambridge.

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lecture12 - Applied Welfare Economics Part IIB: Paper 1 Dr...

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