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ECON 370 NOTES

# ECON 370 NOTES - Calculating Net Social Bene ts s Key...

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Unformatted text preview: Calculating Net Social Bene ts s Key question in CBA: Does the project increase or decrease net social bene ts? Consider a project to build a new road inputs: labour and concrete outputs: reduced commuting times and higher levels of air pollution labour concrete Project more air pollution lower commuting times A project's overall e ect on net social bene ts (NSB) is computed by summing the Δ NSB in the labour market the Δ NSB in the concrete market the Δ NSB associated with the reduced commuting times the Δ NSB associated with the increased pollution levels More generally NSB Project = n X i = 1 Δ NSB Output i + m X i = 1 Δ NSB Input i for a project that has n outputs and m inputs s Remark: For a speci c output Δ NSB Output can be positive or negative. Similarly, for a speci c input Δ NSB Input can be positive or negative Econ 370 Lecture 4: page 1 Two Methods of Calculating Δ NSB We can determine the Δ NSB associated with a project input or output in two ways 1. calculate sum of the changes in CS, PS, government revenues (GR) and external costs/bene ts (EE) Δ NSB = Δ CS + Δ PS + Δ GR + Δ EE 2. calculate quantity changes and weight them by their social values If applied correctly, methods 1 and 2 produce the same Δ NSB s Remark: We will primarily use the second method because it's typically easier and more intuitive To illustrate the equivalence of the two methods, consider a simple project with just one...
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ECON 370 NOTES - Calculating Net Social Bene ts s Key...

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