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- consumer surplus increase = project benefit 4. Non traded goods- calculate how valuable the intangibles must be in order to make project admissible - or; different ways for attaining intangible benefits may be compared Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
Pitfalls of cost-benefit analysis: i) chain-reaction game - include all kinds of secondary ‘benefits’ until NPV > 0 - often, these are not benefits, but transfers ii) double-counting game - count benefits twice iii) labor game - count jobs created by project as benefit instead of cost iv) use B/C ratio of internal rate of return certainty equivalent:the value of an uncertain project measured in terms of how much certain income an individual would be willing to give up for the set of uncertain outcomes generated by the project Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
Chapter 12 – Income redistribution Hard to tell how bigdifferences in incomeare: - income data are based on annual income measures, but income may fluctuate > students earn little now but a lot later in life - people may choose to work part-time > low income doesn’t necessarily mean low hourly wage - compare income of individuals of households? - income before or after > tax, subsidies, transfers poverty line:a fixed level of real income considered enough to provide a minimally adequate standard of living Additive social welfare function: an equation defining social welfare as the sum of individuals’ utilitiesW = U1 + U2 + ... + Un If: 1 Individuals have identical utility functions … 2 … that depend only on their incomes 3 Marginal utility of income diminishes 4 Total income is fixed Then °the optimal solution is: redistribute until complete equalityHowever: assumptions are not valid: - utility does not only depend on income - total amount of income is not fixed Maximin criterion: social welfare depends on the utility of the individual who has the minimum utility in the society °redistribute income to maximize UpoorCan redistribution be Pareto efficient? The rich can benefit too: - Altruism: other people’s income may enter your welfare function > externality problem > people will help the poor, provided others do the same > fair income distribution as public good - Income redistribution as an insurance against future poverty - If people are very poor, they will be coming for your money anyway °fair distribution bus social peace Verspreiden niet toegestaan | Gedownload door Sitwat Hashmi ([email protected])lOMoARcPSD
Research shows °not absolute but relativeincome matters - not income levelsbut income changesdetermine happiness > Preference drift: discover new desires > Reference drift: compare yourself with the rich In kind-transfers:give the poor goods or services instead of money - public housing - free education - medical care °may be inefficient: > a good is at best valued as much as it costs > often, it is valued less > also, administrative costs reduce efficiency Reasons for in-kind transfers