COST BEN ANALYSIS

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

Info iconThis preview shows pages 1–5. Sign up to view the full content.

View Full Document Right Arrow Icon
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
Background image of page 1

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

View Full DocumentRight Arrow Icon
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)
Background image of page 2
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?
Background image of page 3

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

View Full DocumentRight Arrow Icon
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
Background image of page 4
Image of page 5
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 13

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

This preview shows document pages 1 - 5. Sign up to view the full document.

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