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Important Concepts
minus
1) Benefit
2) Cost
- marginal cost
- total cost
- marginal benefit
- total benefit
=
3) Net benefits
- marginal net benefit
- total net benefit
!!!
!!!
Partial equilibrium
interpretation of economic
efficiency
B(X)
B(X*)
NB(X*)
(a)
C(X*)
e
a
X*
NB(X)
NB(X)
Px = MBx = MCx
(b)
X*
g
net-benefits
MCx
(c)
MBx
h
X*
NB(X*)
C(X)
g'
Px
consumer
surplus
f'
producer
h' surplus
Sx = MCx
(d)
Dx = MBx
X*
Recent Developments
1. Total economic value = Use value + Intrinsic value
2. Use value = Actual use value + Option value +
Quasi-option value
3. Option value = Value in potential use by self + Value
in potential use by others + Value in potential use
by future individuals
4. Quasi-option value = Value of avoiding
irreversibilities in the light of expected future
knowledge
5. Intrinsic value = Existence value
Existence Value
Existence value is unrelated to any actual
or potential use
Existence value may be related to
sympathy, or stewardship; as such,
existence values do not fit into neoclassical economics
Existence value may also be related to
"spiritual consumption", and then it does
fit
Existence value is not right-based, as
rights are absolute, and values relative
CBA
CBA should be used for policies and projects,
which unfold over time and be assessed by
calculating a Net Present Value (NPV), or a BenefitCost Ratio (BCR).
4 informational inputs:
1. time horizon
2. benefit schedule
3. cost schedule
4. discount rate
PV FV *
where
1 r t
time
present value
future value
Euro
idea of discounting
NPV
0
0
0
NRt
1 r
NRt
1 x
NPV>
0
IRR=0
NPV
0
NBt
1 r
25
50
100
200
60.95
37.15
13.80 1.91
37.51
14.07
1.98 0.04
23.30
5.43
0.29 0.0009
14.60
2.13
0.05 0.00002
NPV
NBt
1 r
Bt Ct
NPV
0
1 r
Bt
1 r
Ct
1 r
Bd Cd
EC = environmental cost
Alternative Approaches
1. Contingent Valuation
- use surveys that ask
- widely applicable
2. Travel-Cost Method
- obtain a demand curve by examining how
participation varies with the cost of getting there.
- primarily useful for recreation benefits.
3. Property value and Wage differentials (hedonic
prices)
- statistically investigate how these prices vary with
property of job conditions
- more limited application possibilities than for CV.
1.
2.
3.
4.
CBA Example
1.
CBA- Example
t
Bt
Ct
NBt
100
-100
40
10
30
45
10
35
50
10
40
totals
NPV = ???
BCR = ???
r = 5%
Bt
1 r
Ct
1 r
NBt
1 r