Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

(LRMC) can be the default accounting rule. Usually WTP is higher than LRMC in empirical estimates, andsometimes an average of the two is appropriate.The use of WTP or LRMC as shadow prices is mutually exclusive to the application of conversion factorsto the project’s financial operating revenues. For example, if electricity services are provided at 5 cents perkWh, a tariff below unit costs, we can either multiply the tariff by the conversion factor to get the shadowprice; or we can substitute the tariff by the WTP as the shadow price.Table 2.10 Examples of non-market impact valuationSectorNon-marketimpactImpact assessmentTransport - Savings in traveland waiting time- The value of working time savings is the opportunity cost of the time to theemployer, equal to the marginal cost of labour.Healthcare - Life expectancy /quality of lifeEnvironment- Prevention offatalities/injuries- Landscape- NoiseSource: UK Treasury Green Book (2003)- Quality-adjusted life year (QALY) is the most commonly used measure of healthbenefit. Tools such as the EuroQol instrument allow the estimation of the number ofQALYs gained by the recipients of the project.- The WTP for a reduction in the risk of death or serious injury.- The Environmental Landscape Feature (ELF) model constitutes a first attempt at abenefits transfer tool for appraising environmental policies. The model providesestimates of the WTP for some features (e.g. heather moorland, rough grazing, fieldmargins and hedgerows) on an area basis, and estimates of their diminishing marginalutility.- Noise is measured in Noise Exposure Forecast (NEFs); one NEF is equal to a meanexposure over time to one decibel of noise. The sensitivity of real estate prices tochanges in noise level is measured by the noise depreciation sensitivity index.When non-market impacts do not occur in the transactions between the producer and the directusers/beneficiaries of the project services but fall on uncompensated third parties, these impacts aredefined as externalities. In other words, an externality is any cost or benefit that spills over from theproject towards other parties without monetary compensation (see box for some examples).EXAMPLE: POSITIVE AND NEGATIVE EXTERNALITIESBenefits:- Advantages in terms of reduction of risk of accidents in a congested urban area as an effect of a project for the re-location ofa manufacturing plant.- Individuals consuming vaccine against the influenza virus. Those who do not vaccinate themselves receive the benefit of areduced prevalence of the virus in the community.- Damming of rivers for electricity. The damming not only provides for flood mitigation for those living downstream but alsoprovides an area for enjoying water-based recreational activities for free.Costs:- Water pollution by industries that adds poisons to the water, which harm plants, animals, and humans.- The unregulated harvesting of one fishing company in the Mediterranean Sea depletes the stock of available fish for theother companies and overfishing may result.- When car owners freely use roads, they impose congestion costs on all other users and harmful emissions to pedestrians.Due to their nature, externalities are sometimes not well captured by the use of empirical WTP or LRMC,or by conversion factors based on border prices, so that they need to be evaluated separately, for examplethrough willingness-to-pay or willingness-to-accept estimates of the external effect. Valuing externalitiescan sometimes be difficult (particularly environmental impacts), even though they may be easily identified.A project may, for example, cause ecological damage, whose effects, combined with other factors, willtake place in the long run and are difficult to precisely quantify and value. In such a case, a ‘benefitstransfer’ approach may be helpful: this approach applies to the project shadow prices that have beenestimated in other contexts, i.e. for other projects or programmes. In practice, this approach uses values53