- Ourville considers a proposal for a program that is intended to attract more shoppers and increase sales tax revenue.
- Ourvilleconsiders three alternative proposals intended to attract more shoppers and increase sales tax revenue.
- Ourvillehas decided to embark on the public awareness campaign but has to decide how much to spend on it.
- Ourvillehas a budget of $5 million for it's new "Shop Ourville" project and must decide which of several proposals to fund.
- Ourvillehas a budget of $5 million for it's new "Shop Ourville" project and must decide among several proposal each of which can be implemented at different intensities or scales.
- Identify object of analysis (include "do nothing" or status quo)
- Identify all impacts. What changes will occur in the world if this project is done or not done? Good and bad, present and future, local and global, inside and outside.
- Assign values to impacts.
- Calculate net benefit
Generic Scenarios and Corresponding "Rule"
We are faced with several alternative courses of action. We may have resource constraints (in the form of maximum expense that cannot be exceeded).
- Yes or no on a single project : If the net benefits are greater than zero, the project is worth doing
- Pick one of several options : select option with largest net benefit.
- Choosing scale for a project : Stop expanding project when marginal benefit balances marginal cost.
- Accept or reject multiple projects subject to resource constraint : sort by "bang for buck" and calculate cumulative cost up to limit. If lumpy goods and cost goes over, swap out last and bring in next affordable option.
- Accept or reject several and choose scale : Distribute resources so marginal benefit is same across projects..
Understanding the Logic of Side Payments
Ourville is considering a number of options for livening up its downtown shopping district. So far, the ideas on the table are as follows.
- Increasing police patrols so downtown is safer and freer of "nuisance"
- Building a parking garage
- Creating a pedestrian zone
- An advertising cooperative for merchants
- A downtown trolley service
- A sidewalk cleanup project
- A downtown branding project
- Store front and shopping area beautification and renovation
Town residents want a more vibrant and pleasant downtown, but at the end of the day, the primary measure of success is the level of sales and business tax revenue generated by restaurants, retail, and other businesses.
For each proposal, preliminary research has provided cost and benefit estimates (data in this spreadsheet). Each student is assigned one alternative as her "pet project." After some time to examine the numbers and think about why it would be a good idea, students exchange projects so that nobody gets to the be the analyst of her own pet project. In a more extended version of the exercise, the "sponsor" might also be encouraged to debate with the "analyst" over assumptions built into the numbers on the project.
The information provided with each project looks like table below. The level of service currently being proposed is enclosed in a box. Other levels are shown for later analysis about optimal levels.
Project: Provide dedicated "beat" cops to patrol the retail district.
The logic of this intervention is based on that surveys have shown shoppers opt for suburban malls because of safety concerns, and a belief that a police presence has other positive effects through reduction of minor problems. Police services can be "purchased" fractionally in terms of 50% of an officer's time.
STOP AND THINK: Do you agree with the categorization of outputs, outcomes, and impacts in the above diagram? Starting from the right, how would you measure each of the results in the diagram? From a graphic design perspective, can you suggest any tweaks to this diagram to improve it?
The benefit is measured in terms of increased sales tax collection based on increases in sales. We begin with data on how much it would cost to hire security staff and what the expected benefits from increased sales would be.
STOP AND THINK: Before continuing, let's take a look at the numbers in the table. What do the columns and rows represent? What's the basic in the costs column? How about the benefits column?
The first step in CBA is to calculate '''net benefits'''. This is simply the everyday activity of subtracting cost of something from its value to us. The word "net," though, implies that we are taking into account ALL costs and ALL benefits. As you can imagine, what counts as "all" can make a big difference. More on that later.
Net benefit is just total benefits minus total costs:
Once we have written a formula in Excel, we can use "'''autofill'''" to propagate the formula to other cells with Excel making the appropriate changes. Here, for example, our formula is this
The new contents of the cell in column D should be the difference of the value in columns B and C (in this same row).
When we use autofill, we drag the formula down and Excel updates the cell references so that in all of column D the formula is the B cell for that row minus the C cell for that row:
So, here's what we get
picture of data with net benefits
Drawing chart of net benefits
Suppose the proposal on the table is to hire 4 officers to patrol the shopping district. Does the benefit outweigh the cost?
Suppose we face the question of hiring zero, two or four officers.
Finally, suppose we know that we want to deploy some police in our shopping district but we want to determine the optimal number to deploy.