Professional Documents
Culture Documents
Social choice
and cost-
benefit analysis
Economic Policy Analysis
Dragana Radicic
dradicic@lincoln.ac.uk
Choice criteria in private and
public projects
𝐵𝑚 = 𝑏𝑡𝑚 (1 + 𝑖)−𝑡
𝑡=0
• Where i is the interest (discount) rate and (1 + 𝑖)−𝑡 is
the discount factor.
𝑛
𝐶 𝑚 = 𝑐𝑡𝑚 (1 + 𝑖)−𝑡
𝑡=0
𝑁𝑃𝑉 𝑚 = 𝐵𝑚 − 𝐶 𝑚
Second criterion – ‘relative’
NPV
𝐵 𝑚 − 𝐶𝑚 𝐵 𝑚
𝑁𝑃𝑉𝑚𝑟 = 𝑚
= 𝑚 −1
𝐶 𝐶
Third criterion - IRR
𝐵𝑚 − 𝐶 𝑚 = 0
• A project with the highest IRR will be selected.
Identifying the effects of a
project
• Direct and indirect effects of the project in terms of
inputs and outputs of goods and services
• Direct effects = those generated by changes caused
directly by the project in the demand for input or
supply of output goods
• Indirect effects = those causing changes in the
input or output of other markets
• The effects of the project on incommensurable and
intangible goods
Evaluating the effects
• A general criterion
• Benefits of a project are larger than the benefits the
society could obtain from alternative uses of the
same resources
• The benefits of a project are measured by beneficiaries’
aggregate willingness to pay.
• The benefits of alternative projects are measured by
opportunity costs of resources that would be diverted
to alternative projects.
• To measures willingness to pay and opportunity costs
we could use market prices in competitive economy.
Reasons why prices in actual markets
are not an appropriate measure