Chapter Fourteen - Download as PowerPoint by ET6XZE

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									B/C – A and distributional issues

   (Cost Benefit Analysis DEC 51304)
          Zerbe & Dively Ch.11
             R. Jongeneel
           Lecture Plan
 Basics
 FullCompensation Criterion
 Kaldor-Hicks criterion
 Identify gainers and losers
 No undesirable transfers
 Opportunity cost rule
 Use distributional weights
                           Basics

                                                       
            H    N
    dW   Pi dX  (ai  1) Pi dX
                              i
                               h
                                                   i
                                                    h

           h 1 i 1
                       efficiency   distribution


 h: marginal social utility of income of
  individual h
 h: h - h MUYh times MSUh
 Problem: uncertainty w.r.t. MSUYh
   Full compensation criterion
 Assumes   nothing is known about
  MSUYh
 Accepts Pareto Principle as decisive
  criterion
 Requires that losers from a policy
  change are fully compensated from
  the gains of the winners
 Conclusion: PPI is actually realized!
            Example:
Full compensation criterion (before)
Group MSUY (ah)    Net    Distributional    Change in
                  benefit     effect     economic welfare

Poor     1.2       -70         -14             -84



Rich     0.8       +110        -22             +88



Total              +40         -36             +4
             Example:
  Full compensation criterion (after)
Group MSUY (ah)     Net    Distributional    Change in
                   benefit     effect     economic welfare

Poor       1.2        0           0              0


Rich       0.8       +40          -8            +32


Total                +40          -8            +32


Assumption: zero transfer costs
    The Kaldor-Hicks criterion
                          H     N
 Basic   rule:   dW   Pi dX        i
                                        h

                          h 1 i 1
 Ignores   distributional effects / assures
 same MSUY for all h’s

 Simply   calculates the present value of costs
 and benefits and evaluates whether
 NPVbenefit exceeds NPVcosts
    The Kaldor-Hicks criterion
Defense:
 Distributional effects easy to identify and
  remedy
 Existing distribution (chosen by government)
  and already optimal (implying equal MSUYh
  for all h)
Criterion:
 Potential Pareto Improvement
 Compensation possible, but not actually
  carried out
    Identify gainers and losers
 Avoid   problem of distributional
 assumptions
 Simply   identifies who gains (and how
 much) and who loses (and how much)
 Let   the policy maker decide
           No undesirable transfers
              (Willig & Baily)
       Accepts widely used assumptions:
i)      MSUY decreases as Y increases
ii)     MSUY is non-negative for all h
iii)    It is undesirable to transfer money from a
        poorer to a richer individual
       Rank all individuals from poorest to
        richest
                 j            j
       A>B if    NB
                h 1
                       A
                       h     NB ; j  1,2,.....N
                             h 1
                                    B
                                    h
        No undesirable transfers
 Net  benefits must be superior at each stage
  of the summation process from poorest to
  richest income group
 Weaknesses:
- Some policy changes with net social welfare
  benefits might be rejected (no regressive
  transfers)
- Results are sensitive to group definition
Opportunity cost rule (Harberger)
   The benefit of a transfer cannot be greater than the
    cost of making the transfer by the most efficient
    alternative means (opportunity costs)
Example I
                Poor      Middle      Rich    Transfer   NB
                                               B or C
NB K-H           +40        +29       -70         0      -1

NB Opp.Cst       +40        +29       -70        +8      +7

Harberger: Net transfer cost only 1 (cf.-1) instead of
          20% of +40 (=8)
Opportunity cost rule (Harberger)

Example II
               Poor    Middle     Rich    Transfer    NB
                                           B or C

NB K-H         -100      +50      +58        0        +8


NB Opp.Cst     -100      +50      +58       -20       -12


Harberger: Taking into account the costs of actually
compensating the poor (20% of 100=20) makes the project
undesirable
       Distributional weights
 Attach explicit weights to costs and benefits
  accruing to different groups

           K      N
  dW   wk  PdX
               i           i
                            k

           k 1   i 1

with weight of class k equal to wk

								
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