CBA

EXERCISE #1 (Basic transportation example)

• • This example [excel] of a road project evaluation illustrates the mechanics of a standard Cost-Benefit Analysis. Develop a similar matrix for a non-transportation project, and estimate the results

  • Perform a sensitivity analysis using several statistical distributions on the main variables

  • Additional references. Monte Carlo simulation code [JavaScript]  -in progress

EXERCISE #2 (Spanish Hydrology Plan)

• • The Spanish Hydrology Plan did undergo a formal CBA, published in year 2000. The project implementation was aborted after it received the go ahead of the European Commission, who was co-financing it. In the mid-2010s, it still constitutes news, with some parties wanting to reintroduce it

  • Reproduce the CBA matrix estimations, and correct what you consider unreasonable, if anything

  • Data. In [excel] format, and background information (in Spanish) [volume 5] [all volumes]. The summary of costs can be found on pages 108-109 of volume 5; and for the benefits, urban water supply (tap water), page 139; irrigation, page 133; underground water, page 134; the environmental impact is discussed on pages 24-26

  • Solution. In [excel] format

  • Additional problem. Review the exercise, and propose changes, if needed, indicating the likely influence on the results

EXERCISE #3 (UK plan for tackling roadside nitrogen dioxide concentrations)

• In Summer 2017, the British Government published the policy paper “Air quality plan for nitrogen dioxide (NO2) in UK (2017)” containing a CBA, particularly in section 3.2.2, pp. 46 et seq. (a) Make your recommendation based on the CBA results. (b) If the recommendation is subject to getting more detailed information on how it has been accounted or unaccounted for, name the most important single cost or benefit needing further clarification, and give a concise explanation. (c) What would you suggest the authors of the CBA exercise to modify, if anything? (d) Write in a concise manner the main conclusion of your report to the Government, on this CBA application.

EXERCISE #4 (Urban renewal project, in medias res CBA)

• • In 2022, Barcelona’s local authority planned to demolish a block of dwellings in the old town, near the Ramblas, and replace them with a public open space. As part of the plan, the local authority commissions you a CBA in 2023. These are some of the data provided. Part of the dwellings have already been acquired by the municipality in 2021; the rest were to be bought in the open market in 2022, for an estimated total of 50 m.u. (monetary units), or expropriated by compulsory purchase (eminent domain) for an estimated 10 m.u, also in 2020. The demolition works would be undertaken between 2023, for 30 m.u., and 2024, for 20 m.u. The open space would be fully developed in 2024, for a budget of 40 m.u., and in service from 2025 onwards. For simplicity, assume an unrealistic short life time-span of the open space, until 2026 inclusive. Conduct the in medias res CBA, from 2024, comparing the plan against the business-as-usual scenario. Use the data that you consider relevant, and make the rest up. Report the results in a spreadsheet, with an accompanying text clearly and concisely explaining the meaning of the variables included, and the final recommendation.

EXERCISE #5 (Foreign aid project)

• You have been asked to review the quality of a CBA for a USA foreign aid project on a new river bridge in Tanzania; if the CBA study would not yield a positive result, the bridge would not be developed -‘do nothing’ or 'business-as-usual.' 

  • Three costs are included. (c1) Construction cost, to take place during three years: periods 0, 1, and 2. (c2) Maintenance and operational costs for 50 years, after completion. The expenses for both costs are to be shared equally by the local authority (with local currency) and the foreign aid fund (in US dollars). Since the USA is a richer country, a higher opportunity cost is given to their money by adequately correcting the exchange rate used. (c3) The increase in the cost of housing and the house moving costs for the poor population who would not be able to afford the new prices.

  • Four benefits are considered, all during 50 years, after construction is completed. (b1) Savings in time travelling, based on the opportunity cost of time. (b2) Savings on accidents, based on valuation studies. (b3) Savings on vehicle operational costs, due to shorter distances. (b4) The increase of benefits in the retail industry from the new clientele, thanks to the increased mobility.

  • The NPV was positive at a 3% discount rate, and the estimated internal rate of return (IRR) was also positive, with a value of 2.5%. A sensitivity analysis showed that all the main indicators improved (NPV, IRR, B/C) when the analysis was performed in Tanzanian shillings (1 € = 2500 TZS, approximately). Finally, the decision was based on an IRR of 11%, which was obtained after excluding the USA foreign aid from the costs, since the bridge users are local.

  • Based on that information, concisely summarize your review, including advice or corrections, if any, with a short justification.

EXERCISE #6 (Kaldor Criterion)

• Nicholas Kaldor proposed to consider a change as socially preferable to no-change if those winning welfare could compensate those losing welfare, and still be better off with the changed state, i.e., with no individual losing welfare (Pareto improvement). Assume a society composed of four individuals, A, B, C, and D, is faced with a change such that:

  • Case 1. With change, A and B would increase their welfare by 3 m.u. (monetary units) each, and C and D would decrease theirs by 1 m.u. each, while without change all four would maintain their original welfare (0 m.u. variation each). A and B could compensate C and D and still maintain a surplus, therefore the change is Kaldor preferable. Exemplify it numerically. For example, A could give 1 m.u. to C and 1 m.u. to D, with a result of A+1, B+3, C+0, D+0.

  • Case 2. With change, A and B would increase their welfare by 1 m.u. (monetary units) each, and C and D would decrease theirs by 3 m.u. each, while without change all four would maintain their original welfare (0 m.u. variation each). A and B could not compensate C and D and still maintain a surplus, therefore the change is not Kaldor preferable. Exemplify it numerically. For example, … [Please, complete]. 

EXERCISE #7 (Hicks Criterion)

• John Hicks proposed to consider a change as socially preferable to no-change if those losing welfare could not compensate (bribe) those winning welfare to give up the change, and still be better off than with the changed state. Assume a society composed of four individuals, A, B, C, and D, is faced with a change such that:

  • Case 1. With change, A and B would increase their welfare by 3 m.u. (monetary units) each, and C and D would decrease theirs by 1 m.u. each, while without change all four would maintain their original welfare (0 m.u. variation each). C and D could not bribe A and B for giving up the change and still be better off with respect to implementing the change, therefore the change is Hicks preferable. For example, … [Please, complete].

  • Case 2. With change, A and B would increase their welfare by 1 m.u. (monetary units) each, and C and D would decrease theirs by 3 m.u. each, while without change all four would maintain their original welfare (0 m.u. variation each). C and D could compensate A and B for giving up the change and still be better off with respect to implementing the change, therefore the change is not Hicks preferable. For example, in order to avoid the change, C could pay 2 m.u. to A, and D pay 1 to B resulting in A+2, B+1, C-2 and D-1 variation. Compared to the change, i.e., A+1, B+1, C-3 and D-3, A is strictly better (net of +1 m.u.) with the bribe and no change, B is indifferent (+1 in both states, net of 0 variation), C is strictly better off by 1 m.u. if avoiding the change, and D by 2 m.u. Therefore, bribing and stopping the change would become a Pareto improvement with respect to the change: i.e., change not socially desirable. 

EXERCISE #8 (Weights for Distributional Social Cost-Benefit Analysis)

• This simplified [excel] example of a Distributional or Social Cost-Benefit Analysis illustrates the use of weights, and compares the results to the unweighted standard Cost-Benefit Analysis.

• Perform a sensitivity analysis using different weights on the main variables

References

• • - Boardman, Anthony E., David H. Greenberg, Aidan R. Vining, and David L. Weimer (2011), Cost-Benefit Analysis: Concepts and Practice. Third Edition, Pearson (Prentice Hall), Upper Saddle River, NJ.

  • - Johansson, Per-Olov, and Bengt Kriström (2015) Cost-Benefit Analysis for Project Appraisal. Cambridge University Press, Cambridge, UK.

  • - Sugden, Robert, and Alan Williams (1978) The Principles of Practical Cost-Benefit Analysis. Oxford University Press, Oxford, UK.