lecture15 - Applied Welfare Economics Part IIB: Paper 1 Dr...

Info iconThis preview shows pages 1–9. Sign up to view the full content.

View Full Document Right Arrow Icon
Applied Welfare Economics Part IIB: Paper 1 Dr Toke Aidt Lecture 15 Social Cost Benefit Analysis Discounting
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Outline Social cost benefit analysis with distributional considerations. Adjusted social weights approach (used in the UK ( Green Book Annex 5 ). The Marginal Excess Tax Burden (METB) approach (used in the US). Discounting Discounting of financial flows Social discount rates On the choice of social discount rate
Background image of page 2
Adjusted social weights approach If public funds are used as the numeraire (= 1£ of public funds is worth 1£), then we need to normalise the welfare weights to get sensible outcomes. Benchmark : Value of a uniform lump sum transfer = the social value of dividing £1 equally among all citizens. The benchmark defines the opportunity cost of the next-best alternative (spending programme). Any given programme would then have to be “better” than spending the funds on a uniform lump sum transfer in order to be justified on distribution grounds.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
The only game in town? The issue of normalization only arose because we picked “public funds” as numereaire (i.e., treated the expense of the project as money). The moneys needed to finance a project must be raised through taxes (which reduces consumption). Going back to lecture 12, we recall that the opportunity cost of a project or programme should be measured as the social value of the goods forgone because of the project, not as an amount of money.
Background image of page 4
Symmetric treatment of costs and benefits: back to the example. . = = - 4 1 2 4 1 1 2 1 h h x U U SWF h h x U U SWF x x SWF h h h h h h h h h x x U 2 1 log log + = This is invariant to rescaling.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Identical individuals This takes us back to the “efficiency” based cost- benefit test. The point is that we measure costs and benefits in the same unit and they are thus comparable. The common unit is the private marginal value of income which is assumed to be the same for all. 0 ) ( 0 ) ( 0 ) ( 4 2 2 1 1 2 2 1 1 2 1 2 1 - = - = - x q x q x q x q x x SWF x U x U U SWF λ Marginal private value of income
Background image of page 6
Adjustment for the marginal cost of public funds? The project monetary cost £C has to be raised through taxation, so extra tax revenue equal to C must be collected: ) ( 4 2 1 | | 2 1 x x SWF SWF SWF x U x U U SWF - - = - + ) ( 2 2 C x C x - = Opportunity cost of programme: ) ( 4 4 2 2 2 2 | C x SWF C x x U U SWF x U U SWF - = - ) ( 4 C C U U SWF - = )) ( ( 4 1 | | 1 C x SWF SWF SWF C U x U U SWF - - - = - +
Background image of page 7

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
( ( 4 1 | | 1 C x SWF SWF SWF C U x U U SWF - - - = - + ( 29 ) 1 ( 4 1 1 | | C METB x q SWF SWF SWF U SWF + - - = - + λ ( 29 METB C Funds:
Background image of page 8
Image of page 9
This is the end of the preview. Sign up to access the rest of the document.

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.

Page1 / 42

lecture15 - Applied Welfare Economics Part IIB: Paper 1 Dr...

This preview shows document pages 1 - 9. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online