Course Number: 90-747

Cost-Benefit Analysis

Units: 6

This course provides an understanding of the economist's approach to evaluating government investments or programs.

The criterion used by private sector producers in solving similar allocation problems is profit maximization. The analogue in the public sector is maximization of net social benefits. Since it is usually quite difficult to measure theses net benefits, indeed it is often very hard even to know what to measure, and since the political process does not normally provide clear cut signals for most governmental undertakings, it is difficult to know whether the projects contemplated are worthwhile.

The content of cost benefit analysis may be thought of as an attempt to answer a series of questions:

1. What are the rationales for government projects?
2. What is (or should be) a government's objective?
3. Whose social benefits and social costs is the analyst measuring?
4. What is a social cost and what is a social benefit? These questions constitute the heart of the course, and lead to such topics as consumer surplus and producer surplus, shadow prices (i.e., the "value" of something like life itself, for which the market provides little or no guidance regarding quantifiable value), and externalities or indirect effects.
5. Since many government programs have costs and benefits spread over time, how does this affect the analysis?
6. How does one cope with uncertainty?

Not every topic will be discussed in depth. However, by the end of the course every student should have a reasonably clear idea of what the cost benefit approach is, what its strengths are, and where its weaknesses lie. Throughout the course, brief examples will be used to make the theory somewhat more meaningful. Similarly,

some stylized examples of cost benefit studies will show how others have used this approach.

Prerequisites:
90-709 Intermediate Economic Analysis 12 Credits
90-710 Applied Economic Analysis 12 Credits
90-711 Empirical Methods For Public Policy And Management 12 Credits

Faculty:
Karen B. Clay
Tiong Kiong Lim