Lecture Note 15: Social Cost Benefit Analysis - University of ...

Recommendations

Info

e consistent with an optimally designed tax system? Exercise 7 This exercise shows that the marginal cost of funds approach can sometimes work even if the marginal value of private income is not the same for everyone (that assumption is su¢ cient for it to work). Suppose that h is di¤erent for the four consumers, but that (1) they all contribute to the cost of the project and (2) they all bene…t equally from the project ( xh 1 = x1). Show that under those conditions, it is true that P4 h=1 q1 x1 (SMCF ) C > 0 implies that social welfare is increasing. Would this also be true if the project only bene…ts consumer 1, i.e., x1 1 > 0 and xh 1 = 0 for h = 2; 3; 4? 4 Conclusion As a matter of principle, public projects and policy programme do have distributional impacts because they a¤ect individuals di¤erently and because di¤erent individuals value the bene…ts and costs di¤erently. From a practical point of view, short-cut often have to be taken and the distinction between project which got limited distributional impact and projects with a clear and signi…cant distributional impact is a useful starting point. For projects with a clear distributional impact, say an in-work bene…t programme, the adjusted social weights approach provides a transparent set of rules to apply to reach a sensible decision. For projects without a clear distributional impact, say procurement of a new …ghter jet for the army, it may be reasonable to proceed as if everyone is just the same and focus on selecting projects that pass the e¢ ciency test proposed by Harberger and it may also make sense in doing so to take into account that the marginal cost of public funds is greater than one and adjust the …scal ‡ows accordingly. In doing so, however, one is not really dealing with distributional issues in a serious way. 5 Notes on the literature There is a vast literature on social cost bene…t analysis. To navigate it, I recommend the following core readings. It is useful to stick to one textbook and I recommend Boardman et al. (2006, 2011). Boardman (2011) chapter 4 and 19 (not 18 as indicated in the course outline) contain an introductionary discussion of the marginal cost of public funds approach and a little on how to use distributional weights mostly from a practical point of view. Pearce and Nash (1981) got some useful material in chapter 3 on distributional weights. Chapter 5 of the Green Book explains how the UK government deals with distributional weighting. You may …nd it useful to read the lecture note before engaging with these readings. The note is intended to provide you with the theoretical background needed to understand and evaluate the exposition by Boardman, Pearce and Nash and the material in the Green Book. Further readings, for those who want a deeper understanding of the material, the collection of articles, including the introduction chapter, in Layard and 18
Glaister (1994) are highly recommended, but they assume that you are familiar with the basic ideas. References [1] Boardman, et al. (2011). Cost-Bene…t Analysis, concepts and practice. Pearson International Edition, (4th edition). [2] HMT 2003, The Green Book: Appraisal and Evaluation in Central Government ("The Green Book") available for downloading at http://www.hmtreasury.gov.uk/media/3/F/green_book_260907.pdf [3] Pearce, D.W., and C.A. Nash, 1981. The Social Appraisal of Projects: A Text in Cost-Bene…t Analysis. MacMillan. [4] Kleven, Henrik Jacobsen and Claus Thustrup Kreiner, 2006. The marginal cost of public funds: Hours of work versus labor force participation. Journal of Public Economics 90 (10-11), 1955-1973. [5] Layard, R. and S. Glaister, 1994. Cost-Bene…t Analysis, Cambridge. 2nd edition. [6] Harberger, A.C. 1978. On the use of distributional weights in social costbene…t analysis. Journal of Political Economy 86(2), S87-S120. 19
Page 1 and 2: Lecture Note 15: Social Cost Bene
Page 3 and 4: of x2 by x h 2 for consumer h. Unde
Page 5 and 6: conditions are never satis…ed 100
Page 7 and 8: Exercise 1 Suppose an analyst decid
Page 9 and 10: In this case, the social welfare fu
Page 11 and 12: where the social weight attached to
Page 13 and 14: Exercise 5 Illustrate graphically w
Page 15 and 16: suppose that the cost is covered by
Page 17: marginal value of income is the sam
Page 21: Table 3: The re-scaled social welfa

Lecture Note 15: Social Cost Benefit Analysis - University of ...

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?