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Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile.
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13 Sep 14
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For example, a project may provide for the elderly in an area a free monthly visit to a doctor. The value of that benefit to an elderly recipient is the minimum amount of money that that recipient would take instead of the medical care. This could be less than the market value of the medical care provided. It is assumed that more esoteric benefits such as from preserving open space or historic sites have a finite equivalent money value to the public.
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It is sometimes necessary in CBA to evaluate the benefit of saving human lives. There is considerable antipathy in the general public to the idea of placing a dollar value on human life
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These choices can be used to estimate the personal cost people place on increased risk and thus the value to them of reduced risk. This computation is equivalent to placing an economic value on the expected number of lives saved.
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The impact of a project is the difference between what the situation in the study area would be with and without the project.
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In other words, the alternative to the project must be explicitly specified and considered in the evaluation of the project. Note that the with-and-without comparison is not the same as a before-and-after comparison.
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08 Dec 13
Kelley BenedumCost Benefit Analysis
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06 Jun 12
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The idea of this economic accounting originated with Jules Dupuit, a French engineer whose 1848 article is still worth reading. The British economist, Alfred Marshall, formulated some of the formal concepts that are at the foundation of CBA.
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Thus, the Corps of Engineers had create systematic methods for measuring such benefits and costs. The engineers of the Corps did this without much, if any, assistance from the economics profession. It wasn't until about twenty years later in the 1950's that economists tried to provide a rigorous, consistent set of methods for measuring benefits and costs and deciding whether a project is worthwhile. Some technical issues of CBA have not been wholly resolved even now but the fundamental presented in the following are well established.
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One of the problems of CBA is that the computation of many components of benefits and costs is intuitively obvious but that there are others for which intuition fails to suggest methods of measurement. Therefore some basic principles are needed as a guide.
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There Must Be a Common Unit of Measurement
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i.e., there must be a "bottom line."
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The value of that benefit to an elderly recipient is the minimum amount of money that that recipient would take instead of the medical care.
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Not only do the benefits and costs of a project have to be expressed in terms of equivalent money value, but they have to be expressed in terms of dollars of a particular time.
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If people have a choice of parking close to their destination for a fee of 50 cents or parking farther away and spending 5 minutes more walking and they always choose to spend the money and save the time and effort then they have revealed that their time is more valuable to them than 10 cents per minute.
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Generally the value of cleaner air to people as revealed by the hard market choices seems to be less than their rhetorical valuation of clean air
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20 Apr 11
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Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile. These projects may be dams and highways or can be training programs and health care systems.
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The idea of this economic accounting originated with Jules Dupuit
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But the practical development of CBA came as a result of the impetus provided by the Federal Navigation Act of 1936
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In order to reach a conclusion as to the desirability of a project all aspects of the project, positive and negative, must be expressed in terms of a common unit; i.e., there must be a "bottom line."
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The most convenient common unit is money.
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Not only do the benefits and costs of a project have to be expressed in terms of equivalent money value, but they have to be expressed in terms of dollars of a particular time.
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the discounted value or present value of a dollar available t years in the future
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discounted present value of that benefit of the project
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The valuation of benefits and costs should reflect preferences revealed by choices which have been made.
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The value of time should be that which the public reveals their time is worth through choices involving tradeoffs between time and money.
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the valuation of the benefit of cleaner air could be established by finding how much less people paid for housing in more polluted areas which otherwise was identical in characteristics and location to housing in less polluted areas
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The relationship between the market price and the quantity consumed is called the demand schedule
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The increase in benefits reulting from an increase in consumption is the sum of the marginal benefit times each incremental increase in consumption.
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