Download presentation

Presentation is loading. Please wait.

Published bySonya Lister Modified over 2 years ago

1
B/C – A and distributional issues (Cost Benefit Analysis DEC 51304) Zerbe & Dively Ch.11 R. Jongeneel

2
Lecture Plan Basics Full Compensation Criterion Kaldor-Hicks criterion Identify gainers and losers No undesirable transfers Opportunity cost rule Use distributional weights

3
Basics h : marginal social utility of income of individual h h : h - h MUY h times MSU h Problem: uncertainty w.r.t. MSUY h efficiency distribution

4
Full compensation criterion Assumes nothing is known about MSUY h Accepts Pareto Principle as decisive criterion Requires that losers from a policy change are fully compensated from the gains of the winners Conclusion: PPI is actually realized!

5
Example: Full compensation criterion (before) GroupMSUY (a h )Net benefit Distributional effect Change in economic welfare Poor1.2-70-14-84 Rich0.8+110-22+88 Total+40-36+4

6
Example: Full compensation criterion (after) GroupMSUY (a h )Net benefit Distributional effect Change in economic welfare Poor1.2000 Rich0.8+40-8+32 Total+40-8+32 Assumption: zero transfer costs

7
The Kaldor-Hicks criterion Basic rule: Ignores distributional effects / assures same MSUY for all h’s Simply calculates the present value of costs and benefits and evaluates whether NPV benefit exceeds NPV costs

8
The Kaldor-Hicks criterion Defense: Distributional effects easy to identify and remedy Existing distribution (chosen by government) and already optimal (implying equal MSUY h for all h) Criterion: Potential Pareto Improvement Compensation possible, but not actually carried out

9
Identify gainers and losers Avoid problem of distributional assumptions Simply identifies who gains (and how much) and who loses (and how much) Let the policy maker decide

10
No undesirable transfers (Willig & Baily) Accepts widely used assumptions: i) MSUY decreases as Y increases ii) MSUY is non-negative for all h iii) It is undesirable to transfer money from a poorer to a richer individual Rank all individuals from poorest to richest A>B if

11
No undesirable transfers Net benefits must be superior at each stage of the summation process from poorest to richest income group Weaknesses: - Some policy changes with net social welfare benefits might be rejected (no regressive transfers) - Results are sensitive to group definition

12
Opportunity cost rule (Harberger) The benefit of a transfer cannot be greater than the cost of making the transfer by the most efficient alternative means (opportunity costs) Example I PoorMiddleRichTransfer B or C NB NB K-H+40+29-700 NB Opp.Cst+40+29-70+8+7 Harberger: Net transfer cost only 1 (cf.-1) instead of 20% of +40 (=8)

13
Opportunity cost rule (Harberger) Example II PoorMiddleRichTransfer B or C NB NB K-H-100+50+580+8 NB Opp.Cst-100+50+58-20-12 Harberger: Taking into account the costs of actually compensating the poor (20% of 100=20) makes the project undesirable

14
Distributional weights Attach explicit weights to costs and benefits accruing to different groups with weight of class k equal to w k

Similar presentations

© 2017 SlidePlayer.com Inc.

All rights reserved.

Ads by Google