By D. W. Pearce (auth.)
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Additional info for Cost-Benefit Analysis
In perpetuity and discounting at s we then have Ir Cs Ir K=- +- =- +C0 . 17) r which, in the simple case under consideration, is a restate- ment of the social opportunity cost argument. Now we can consider what happens on the benefit side. For every £1 of benefit flow, assume a fraction b accrues as a reinvestable cash flow and the remainder ( 1 - b) as a consumption benefit which cannot be reinvested. 18) B(£l)=br+(l-b) where it will be seen that the reinvestable fraction earns a rate of return r when reinvested.
To answer this question we can look at the inputs used in producing i. Imagine there is only one input, labour. ) Then the forgone output in project j is equal to what the labour used in i could have produced in project j. e. 8) The equivalence between C; and WTP; is assured if, and only if, labour is paid the value of its marginal product. Generalising, the equivalence will hold if, and only if, all inputs to i are priced at their respective values of their marginal products. This will only be true under perfect competition.
23 The Origins of Cost-Benefit Analysis Now, consider C2 , the situation after the project is implemented. e. moving from C2 back to C1 . If the move is made, we see that at C 1 we can move up UPC 1 to C4 , which is Pareto superior to C2 • We have an oddity. The move from C1 to c2 is an improvement, but once at c2 the move back to c1 is also an improvement. This is the Scitovsky 'reversal paradox'. 24 3 The Measurement of Costs and Benefits Chapters 1 and 2 indicated that the basic CBA rule is that an expenditure is to be judged potentially worth while if its benefits exceed its costs, where benefits and costs are defmed to include any welfare gain and loss which occurs because of the expenditure on the project.
Cost-Benefit Analysis by D. W. Pearce (auth.)