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Principles Of Cost-Benefit Analysis

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  • Robin Boadway

    (PRI)

Abstract

This paper summarizes the procedure for the economic evaluation of government projects and policy reforms. It begins with the social welfare function underpinnings of cost-benefit analysis including the role of distributive weights and the choice of numeraire. It then turns to the conduct of a social cost-benefit analysis using the net present value criterion. This includes the shadow pricing of market products and inputs affected by the project, indirect welfare effects, the opportunity cost of project finance, the evaluation of non-marketed inputs and outputs, and the opportunity cost of risk. Issues involved in selecting a discount rate are discussed, especially those arising from imperfect capital markets. Finally, since many public projects have long-term consequences, the principles that might be used to take account of effects of projects on future generations are outlined. Techniques for accounting for these effects, such as generational accounting, are summarized and its shortcomings highlighted.

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Bibliographic Info

Paper provided by East Asian Bureau of Economic Research in its series Development Economics Working Papers with number 22594.

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Date of creation: Jan 2006
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Handle: RePEc:eab:develo:22594

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Postal: JG Crawford Building #13, Asia Pacific School of Economics and Government, Australian National University, ACT 0200
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Keywords: evaluation; government projects; policy reforms; imperfect capital markets; generational accounting; shadow pricing;

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References

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  1. Charles Blackorby & David Donaldson, 1990. "A Review Article: The Case against the Use of the Sum of Compensating Variations in Cost-Benefit Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 471-94, August.
  2. Wildasin, David E, 1984. "On Public Good Provision with Distortionary Taxation," Economic Inquiry, Western Economic Association International, vol. 22(2), pages 227-43, April.
  3. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  4. Boadway, Robin W, 1978. "Public Investment Decision Rules in a Neo-Classical Growing Economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 19(2), pages 265-87, June.
  5. Ahmad,Etisham & Stern,Nicholas, 1991. "The Theory and Practice of Tax Reform in Developing Countries," Cambridge Books, Cambridge University Press, number 9780521397421, April.
  6. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  7. Harberger, Arnold C, 1971. "Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay," Journal of Economic Literature, American Economic Association, vol. 9(3), pages 785-97, September.
  8. Boadway, Robin W, 1974. "The Welfare Foundations of Cost-Benefit Analysis," Economic Journal, Royal Economic Society, vol. 84(336), pages 926-39, December.
  9. Alan J. Auerbach & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "Generational Accounting around the World," NBER Books, National Bureau of Economic Research, Inc, number auer99-1, octubre-d.
  10. Dan Usher, 1986. "Tax Evasion and the Marginal Cost of Public Funds," Working Papers 637, Queen's University, Department of Economics.
  11. Alan J. Auerbach & Laurence J. Kotlikoff & Willi Leibfritz, 1999. "Introduction to "Generational Accounting around the World"," NBER Chapters, in: Generational Accounting around the World, pages 1-8 National Bureau of Economic Research, Inc.
  12. Sandmo, Agnar, 1998. "Redistribution and the marginal cost of public funds," Journal of Public Economics, Elsevier, vol. 70(3), pages 365-382, December.
  13. Diamond, Peter A & Mirrlees, James A, 1971. "Optimal Taxation and Public Production II: Tax Rules," American Economic Review, American Economic Association, vol. 61(3), pages 261-78, June.
  14. Browning, Edgar K, 1976. "The Marginal Cost of Public Funds," Journal of Political Economy, University of Chicago Press, vol. 84(2), pages 283-98, April.
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Cited by:
  1. Chavez, Holcer & Nadolnyak, Denis A. & Saravia, Miguel, 2013. "Socioeconomic and Environmental Impact of Development Interventions: Rice Production at the Gallito Ciego Reservoir in Peru," International Food and Agribusiness Management Review, International Food and Agribusiness Management Association (IAMA), vol. 16(1).

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