COST BEN ANALYSIS

# COST BEN ANALYSIS - Cost benefit analysis(more formal We...

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1 Cost benefit analysis (more formal) - We have already done some cost benefit analysis but let’s follow an example from a book to make it more real world useful - After you are comfortable with this section you can put cost benefit analysis on your résumé - An example (from a book) - Should your state replace a freeway? Page 203

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2 A. Measuring the costs of a project 1. Measuring current costs Cash-flow accounting - Calculate cost by adding up what government pays for inputs - Calculate benefits by adding up income or government revenue from project - Main weakness : Does not measure social marginal cost Social marginal cost = opportunity cost ( ) - What is the OC of the asphalt? If a good is sold in a perfectly competitive market OC = Price Marginal social cost = Price - What is the OC of the labor (each unit of labor per hour) if there is unemployment due to a minimum wage Specifically: suppose minimum wage = \$20 and unemployed construction workers value their leisure at \$10/hr (would go to work for \$10/hr)
3 - Economic costs are only those costs associated with diverting a resource from its next best use. For labor in our example it is \$10/hr since that is how much workers value watching TV (any other costs are just transfers) Rents – Payments to resources above what you have to pay to get them - Suppose ½ the man hours come from employed workers and ½ come from unemployed workers. What is the total cost of labor for the project?

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4 2. Measuring future costs PDV - Why is a \$1 tomorrow worth less than a \$1 today? Social discount rate – The correct value of r for measuring the PDV for social investments - For a firm it is the OC for that money Suppose a firm could invest the money and get a certain return of 10% but is taxed at 30%, what is the
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## This note was uploaded on 12/27/2011 for the course ECON 302 taught by Professor Ahmad,y during the Fall '08 term at Wisc Whitewater.

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COST BEN ANALYSIS - Cost benefit analysis(more formal We...

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