Ch9 Lecture Notes - Benefit/Cost Analysis and Public Sector...

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Benefit/Cost Analysis and Public Sector Economics Chapter 9
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Learning Objectives 05/11/09 2
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Benefit/Cost Ratio The benefit/cost ratio (B/C) is an economic analysis technique used commonly, especially by governmental agencies. In its purest form, the numerator B consists of economic consequences to the people (benefits and disbenefits), while the denominator C consists of consequences to the government (costs and savings). The units in the calculation can be present worth , annual worth or future worth dollars; they have to be the same in the numerator and denominator. A B/C ratio > 1 indicates that the project is economically attractive. If disbenefits are involved, they are substracted from the benefits; if government savings are involved, they are subtracted from the costs. 05/11/09 3
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The benefit/cost (B/C) ratio was developed, in part, to introduce objectivity into the economic analysis of public sector evaluation in an effort to reduce the effects of politics and special interests. However, there is always predictable disagreement among individuals and groups about how the benefits of an alternative are defined and economically valued. The different formats of B/C analysis and associated disbenefits of an alternative, are discussed in Chapter 9. The B/C analysis can use equivalency computations based on PW, AW or FW values. Performed correctly, the benefit/cost method will always select the same alternative as PW, AW, and ROR analyses. 05/11/09 4
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Public Sector Examples Hospitals and clinics Transportation: highways, bridges, waterways, airports Parks and recreation Utilities: water, electricity, gas, sewer, sanitation Police and fire protection Courts and prisons Sports arenas Emergency relief Schools: primary, secondary, Community colleges, universities Food stamp and rent relief programs Job training Economic development Public housing Convention centers Codes and standards 05/11/09 5
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Characteristics There are significant differences in the characteristics of private and public sector alternatives. Characteristic Public Sector Private Sector Size of Investment Larger Some Large; medium to small Life Estimates Longer: 30 – 50 years Shorter: 2-25 years Annual Cash Flow estimates No Profit: costs and benefits Revenues – profit cost estimates 05/11/09 6
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Public Sector Projects To perform an economic analysis of public alternatives, the costs (initial and annual), the benefits, and the disbenefits must be estimated as accurately as possible in monetary units. Costs - estimated expenditures to the government entity for construction, operation, and maintenance of the project, less any expected salvage value. Benefits - advantages experienced by the owners (the public).
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