CBA Cost-Benefit Analysis
Assignment 1. Practice: read/work through 1 and 2, use 1 to do 3 and 4. Hand in: 5,7,8,10.
Problem Set 1
1. On pages 138ff, Stokey and Zeckhauser describe four cost-benefit scenarios (and one sub-scenario).
- Case 1: Accept or reject a single project.
- Case 2a: Choose one of a number of alternative projects.
- Case 2b:Choose the appropriate scale for a project.
- Case 3: Accept or reject a number of projects subject to resource constraint
- Case 4: Accept or reject a number of projects and choose size for each subject to resource constraint
They describe three conditions to be considered:
- Is there more than one alternative project under consideration?
- Are there resource constraints?
- Are the alternatives scalable?
And they state several versions of the fundamental rule:
- Adopt proposal if net benefits greater than zero.
- Choose the alternative with the largest net benefit
- Expand the project until marginal cost equals marginal benefit
- Rank projects by ratio of net benefit to cost, select projects in order until budget exhausted.
- Allocate resources so that marginal net benefits are equal across all projects.
Arrange these in a flowchart that describes how we decide what process/criterion to apply.
2. In thinking about how to do a cost-benefit analysis on a project, you come up with the following list of tasks:
- Identify all projects or options that will be considered
- Calculate net benefits for each one
- Make decision
You admire your colleague's capacity for thinking top-down and you start to sketch the "inside" of each of top level tasks. You note that after putting together a list of options you need to write something about the appropriate level of detail for this analysis before you get started. And then you start to unpack the top level steps:
- Identify all projects or options that will be considered
- Calculate net benefits for each one
- Identify stakeholders
- Identify costs/benefits for each stakeholder
- Make decision
- Recognize which kind of CBA scenario we are dealing with
- Apply appropriate version of fundamental rule
And further refinement is possible, 1. identifying stakeholders for each option turns out to involve two steps after identifying who they are
- Identify impacts exhaustively and without bias
- Distinguish equity and efficiency issues
And 2. identify net benefits for each stakeholder involves
- Research, including working through "willingness to pay" analyses
- Calculating present values of future costs
- Pricing intangibles
So we have
- Identify all projects or options that will be considered
- Calculate net benefits for each one
- Identify stakeholders
- Identify impacts exhaustively and without bias
- Distinguish equity and efficiency issues
- Identify costs/benefits for each stakeholder
- Research, including working through "willingness to pay" analyses
- Calculating present values of future costs
- Pricing intangibles
- Identify stakeholders
- Make decision
- Recognize which kind of CBA scenario we are dealing with
- Apply appropriate version of fundamental rule
Draw a stepwise refinement flow chart that represents the steps just described.
3. Categorize the following scenario using the flowchart you constructed in the problem above. A student comes to the end of the semester and needs to grapple with the situation her procrastination has produced. Four courses with exams and papers due, only one week to do them. She recognizes that some projects are easier than others, that she gets more out of an hour of study for some courses than for others. She needs to make a plan for how to allocate her time during this last week of the semester.
4. Categorize the following scenario using the flowchart you constructed in the previous problem. You work for a youth agency that has just learned about a grant opportunity. Your ED has asked you to think about whether it makes sense to apply for the grant. You look over the RFP and begin to estimate how much work it will take to prepare the proposal, how likely the grant is to be funded at a particular level, etc.
5. Consider your MPR, making whatever imaginaries and fantasies might be necessary to complete this problem. Identify at least two alternative projects among which you will have to recommend and identify the stakeholders for whom you ought to calculate costs and benefits for? You may want to distinguish between (1) thinking like your client is probably thinking, and (2) thinking like you would as a no-holds-barred analyst.
6. Three sample problems on pp 146-7
7. You are on the city management staff in the town of Ourville. As a part of a downtown revitalization, you have been given job of evaluating a project that would invest in putting a few more foot patrol police officers on the street in the downtown shopping area. The police department is enthusiastic — assuming the budget can be found — as they have a community policing and local foot beat program up and running. The logic of the program is that a little more police presence will all by itself increase shopper confidence and thus increase sales and eventually sales tax receipts. Plus, the police presence should reduce some of the crime that deters commercial activity (partly by catching the bad guys and partly by making bad guys stay away because they don't want to get caught) — stores will stay open later, more down town foot traffic means better atmosphere, and all this leads to higher sales tax revenues too. Plus, the citizenry wants a more pleasant downtown.
Draw a logic model representing this project.
8. For the project just described, we have some data on costs and benefits of various levels of implementation. Fill in this table and sketch the cost, benefit, and net benefit vs. level of implementation on one chart and marginal net benefit per unit of implementation on another. If you have no budget constraints, how much policing should we do?
FIX MNB CHART
9. Another project on the table is building a parking structure for the downtown shopping area. The project can be implemented at various scales from the very small (25 spaces) to the very large (200 spaces) or not at all. Our planning department has provided some cost and benefit data as shown below. Fill in the net benefits and the marginal net benefits (calculated "per parking slot" this time) and draw charts. If you have no budget constraints, how big a parking structure do you build? Download PDF of answer sheet if desired.
10. Project: Convert several streets to a pedestrian zone. The "outdoor mall" model has been very successful in other towns. This proposal involves closing off a few streets and investing in some street furniture to make the area more pedestrian friendly. It is not considered a major renovation because the style of the street is already very attractive due to past projects. The benefit is measured in terms of increased sales tax collection based on increases in sales.
Calculate net benefits, marginal net benefits and produce charts of cost,benefit & net benefit and marginal net benefit per dollar. How much would you spend on the pedestrian zone? Download PDF of answer sheet if desired.
11. Repeat the above for five more projects: street cleanup, branding, beautification, downtown trolley, and advertising coop.
| Advertising | Cost | Benefit | Trolley | Cost | Benefit | CleanUp | Cost | Benefit | Branding | Cost | Benefit | Beautification | Cost | Benefit | ||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | ||||
| 1 | 25 | 175 | 1 | 50 | 30 | 1 | 25 | 110 | 1 | 25 | 90 | 1 | 50 | 100 | ||||
| 2 | 50 | 275 | 2 | 100 | 75 | 2 | 50 | 175 | 2 | 50 | 140 | 2 | 100 | 180 | ||||
| 3 | 75 | 330 | 3 | 150 | 200 | 3 | 75 | 225 | 3 | 75 | 175 | 3 | 150 | 240 | ||||
| 4 | 100 | 380 | 4 | 200 | 400 | 4 | 100 | 250 | 4 | 100 | 200 | 4 | 200 | 290 | ||||
| 5 | 125 | 415 | 5 | 250 | 500 | 5 | 125 | 255 | 5 | 125 | 210 | 5 | 250 | 340 | ||||
| 6 | 150 | 450 | 6 | 300 | 550 | 6 | 150 | 258 | ||||||||||
| 7 | 175 | 465 | 7 | 300 | 260 | |||||||||||||
| 8 | 200 | 475 |
12. Consider these charts
LAB. Play with model and replicate main graph with all MNBs.
benefit-cost-downtown-shopping-area-model.xlsx
Wanted Problems
- Practice identifying stakeholders and figuring out when to stop
- Practice assigning costs and benefits
- What do to when one party's benefit is another party's cost?
- Practice calculating net benefit
- Practice calculating marginal benefit
Indications, contraindications, assumptions, caveats
Vocabulary willingness to pay, cost effectiveness, benefit cost ratio,