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GLOSSARY Avoided Cost is the cost of an activity or facility that could be avoided by choosing an alternative course of action. For example, avoided water supply costs are the costs of water supply that are avoided by conservation, which reduces the need for new supply projects. Consumer Surplus is the difference between what a commodity i s worth to a consumer and what he or she actually pays for it. Costs are the resources needed for a course of action-in this case for BMP implementation. Costs are valued by identifying the opportunities forgone by diverting the requisite resources to the BMP. In other terms, "What do we give up to get the BMP?" Cost-Effective is defined in the MOU as when the present value of benefits exceeds the present value of costs. Cost-effectiveness analysis, then, in the context of the MOU, is analysis that calculates and compares the present value of costs to the present value of benefits. [Note: A textbook definition would distinguish between the terms cost- effectiveness analysis and cost-benefit analysis (CBA). CBA measures all costs and benefits in dollar terms, whereas CEA measures at least one benefit in its physical units (e.g., acre- feet of water saved).] Discount Rate is the rate used to calculate the present value of future benefits and costs. Discount rates can be either nominal (not adjusted for inflation) or real (adjusted for inflation). Escalation Rate is the average rate of increase in the inflation-adjusted future cost of water supply. External Costs and Benefits. Au external cost is when one party, as a result of its actions, adversely affects another party either by reducing its productivity or well being, or by raising its costs. Au external benefit is where one party beneficially affects another party either by increasing its productivity or its well being, or lowering its costs. Externalities (external costs and benefits) are distinguished from "pecuniary" effects when the adverse or beneficial effects of the others actions are not market interactions. Rather, one party's action has a direct physical effect on the welfare or costs of others. Fixed Costs are those that do not change as output level changes over the time horizon being analyzed. These costs typically include capital goods, land, and long-term contract commitments. In the short run, fixed costs do not enter into the calculation of marginal costs. In the long run, all costs are variable. Incremental Costs and Benefits are the costs and benefits that occur due to a course of action (e.g., BMP implementation) that would not occur otherwise. In other terms, incremental c o s t s and benefits are the additional “increment” of costs and benefits from implementing a BMP. Inflation is the rate of change in a price index (e.g., the Consumer Price Index) over a certain period of time that reflects a general increase in all prices so that relative prices of different goods and services remain the same. Annual inflation, for example, reflects the change in the purchasing power of a dollar over the course of a year. Life-Cycle Analysis examines the costs and benefits of an action (e.g., a BMP) over its entire expected life span. Marginal Cost is the additional cost incurred by producing one more unit of output ( e.g., the additional costs of supplying one more acre-foot of water). Market Price is determined in a market, which is where individuals, firms or other organizations come together to exchange goods and services. Markets can take many forms, including dealerships, financial asset and stock exchanges, stores, bulletin board listings, and brokerages. Net Present Value is the present value of benefits minus the present value of costs. Present value refers to the value of a cost or benefit today that will be incurred or accrued sometime in the future. The present value of a cost or benefit is determined b y discounting the future cost or benefit utilizing a discount rate. Opportunity Costs are the true costs faced by a decision-maker, measured as the highest valued (best) alternative that is foregone when an action is taken. Project or Device Life Span. The life span of a device is its remaining physical or productive lifetime. It begins when the device is acquired and ends when the device is retired from service. Project life is the remaining physical or productive lifetime of devices (or assets more generally) required for a project. Device or project life span is often not the same as the useful life for tax purposes. Period of Analysis is the period over which the cost-effectiveness of the BMP is analyzed. The period of analysis does not have to be the same as the project life span, although this is often a convenient assumption. Real Dollar Value is the dollar value of an item that has been adjusted for inflation. Sunk Costs have already been incurred and are not reversible. For example, most engineering and design costs are sunk once they have been paid for. Unlike land or equipment, the design cannot usually be sold at a later time (if the design can be sold, then it is not sunk). Sensitivity Analysis is the process where the assumptions of analysis are tested to determine how much influence they have on the results. In other terms, "How sensitive are the results to alternative assumptions?" Transfer Payments are direct transfers of money or economic value from one party to another without an exchange of goods or services in return. Variable Costs are the costs that change in response to changes in level of output by a firm. These costs often include energy, labor, and supplies. Willingness to Pay is the amount a n individual would be willing to pay if he or she could obtain the item by making a payment. The maximum amount h e would be willing to pay for the item measures its value to him in monetary terms. Willingness to Accept is the amount one would have to pay the individual if he or she could be induced by a payment to go without the item. The minimum amount that he should be willing to accept to forego the item is an alternative monetary measure of its value (alternative to willingness to pay).
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