Methods Of Cost-Benefit Studies, Economic Impacts, And Discounting

Choose three (3) out of the following five (5) optional question topics for your exam essay responses

Option 1: What are the main methods used in cost-benefit studies to monetize values that otherwise do not have market values? Provide examples when you explain each of the major methods.

Option 2: Why do economic impact studies use discounting?  What are the mechanics of discounting?  What are the cautions in using discounting under different scenarios?  Provide examples to explain the points that you make.

Option 3: What is a study baseline? Why is it so critical to establish an accurate baseline situation in any kind of impact study regarding regulations?  What defines the elements of the baseline?  How is it used in a study?

Option 4: What would be the scope (i.e. issues that would arise, stakeholders impacted, etc.) of an impacts study regarding a proposed regulation in British Columbia that will restrict the rights of foreigners to buy Canadian residential real estate exclusively to newly built houses and apartments (i.e. the new Australian model).

Option 5:  Are distributional impacts and equity considerations critical to regulatory impacts studies (i.e. using cost-effectiveness or cost-benefit methods)?  If not, why not, and where else should they be addressed?  If yes, in what way, and when and how can they be accounted for in the study?  Be sure to fairly characterize the different views on this subject amongst scholars and experts and use examples to explain your position.  

Cost-Benefit Analysis in Monetization of Values

Cost benefit analysis is used for providing a comparison between the benefits and total costs of executing a project or venture (Boadway, 2016).  The technique assumes that monetary value can be placed on all the benefits and cost of the programs. Discounting is the process that has been used tocalculate the anticipated costs and benefits of the project throughout the whole life span of the project for converting the future returns into the present value of money. It has been assumed in this context that present value of money is higher than the expected financial returns and value of goods. Therefore, higher the discount rates of a project lesser will be the future returns and vice versa. The different types of cost-benefit analysis are Benefit cost ratio (BCR), Net present value (NPV), Incremental Cost Benefit Ratio and the Payback Period (Hastings, 2015). However, there are different factors considered as benefits to a project. The benefits are concerned as a well-being to the overall society while quantifying them. Therefore, project will have to both indirect and direct positive impacts.

The different project scenarios will have different impacts on the society and may or may not generate revenue. The purpose of a public investment project is to contribute to the society on the whole. On the contrary, the purpose of a private investment is generating revenue by selling the organizational products to the consumers (Coates IV, 2014). It is easier to calculate the direct benefits from the project than the indirect benefits as there are other competitors offering similar products and services to the consumers. Societal benefits are form of benefits that not only affects the direct beneficiaries but also the society as a whole. The cost benefit analysis requires quantification of all types of benefits, even the social benefits for calculating the viability of a project.  Economists have developed artificial prices for different types of benefits by examining the amount they are willing to pay for them.  The two main approaches for monetizing values in cost benefit analysis are revealed preference technique and stated preference technique (Shih & Tseng, 2014).

In revealed preference technique the consumer behaviour comparisons between two similar instances are drawn as per the scenario of the cost benefit analysis. This technique uses hedonic pricing where consumers are able to identify the value of different intangible goods and the values are uncovered using various statistical tools and techniques (Freeman III, Herriges& Kling, 2014). On the other hand, travel cost method is also used to quantify the intangible benefits by considering the intangible goods and market as complements to such an extent that accessibility to intangible goods only possible by making purchase of services and goods in the market.  

On the contrary, the stated preference techniques are based on hypothetical values that have been acquired from different studies or surveys. The consumers are asked that whether they are willing to pay for the investment project or not (Springmann et al., 2016).  This method is also known as contingent valuation method as it one of the major tools for measuring and estimating the economic benefits of protecting the environment and improving the environmental quality and the consumers’ willingness to pay for improved environment conditions

Direct and Indirect Positive Impacts on the Society

The major challenge faced by the economist is to identify the appropriate method of quantifying the monetary values of the projects. In case of projects of improving the quality of life, the major benefits of the project is reduction in number of days spent in a hospital and the data from the insurance companies and medical facilitates can be used to monetize the benefits of reducing the number of days spent in a hospital (Sanders et al., 2016).  People are benefitted as they are able to work for more number of days which can be calculated using the average labour values and labour costs. Health life expectancy is one of the major benefits of this project and it can be calculated using Eurostat and EHLEIS for each countries using the Sullivan method.  

On the contrary, in case of transport investment projects, the major benefits are better access to different routes and reduction of accidents of different projects (Van der Wee et al., 2015). In this scenario, the marginal costs of the transporters are multiplied with the hours saved by distance reduction. The marginal cost will include cost of maintenance of services, labour and fuel.

The economic impact studies require discounting or the reason that the economic evaluations requires to discount the future costs and the advantages. Discounting makes the current expenses along with the advantages worth more than those taking place in future as there is an opportunity expense in spending money now and attaining suitable rate of return in future (Jit & Mibei, 2015). Moreover, discounting methods are used in carrying out economic evaluations as it considers pure time preferences that are broadly observed as an empirical process in identifying catastrophic risks and growth in consumption in an economy. Analyzing discount rates is deemed to be vital in economics for the reason that it can facilitate in trading off the present for attaining better future monetary benefits.

The mechanics of discounting includes the “Cost-Benefit Analysis” that facilitates in analyzing the economic advantages within the public investment projects (Hauk, Knoke & Wittkopf, 2014). This facilitates in using certain mechanics of discounting method such as nominal and real discount rates and inflation. Nominal rates are explained as the market rates, for instance, the yearly percent earning rate of stocks, treasury bills, certificates of deposits and bonds. The real interest rate discounting mechanics does not include inflation and they are called real because they indicate real changes in the economic sector within demand/supply.

There are certain cautions those must be taken into consideration in suing the discounting method under various scenarios. For instance, at the time of valuating a company through discounting, the revenue growth rate along with the operating margin at a highest possible level must be considered in computing the value in better manner within best-case scenario (Santatiwongchai et al., 2015). Discounting is also used in carrying out multiple scenario analysis in which the value of risky asset is computed with varying the assumptions regarding macroeconomic and asset based variables. In such scenario certain cautions must be considered, for instance, the factors based on which such scenario is built and the number of scenarios in evaluating each factor. Discounting with the decision tree analysis is used in scenarios where in evaluating the assets it has to pass through a series of tests in which failure at any point will lead to total loss of value (Batkovskiy et al., 2015). Discounting in such scenario must also consider certain cautions, for instance, distinguishing between each node in the decision tree accurately to attain appropriate valuation of an asset.

Revealed and Stated Preference Techniques in Quantifying Monetary Value

The main aim of the baseline study is to access and monitor the effectiveness and progress during implementation and completion of activities. Planning of a baseline study requires the organization to identify the metrics of evaluation, changes to be measured and the type of comparison that needs to be made (Rose, Shone &Espiner, 2014). The two different ways of measuring the change are “before and after activity” and another “with or without activity”.  This method measures the changes during the timespan in a particular activity, on the contrary, the other method measures the changes in the location of the activity once without the implementation pf the activity and then with the implementation of the activity.

It is essential to establish accurate baseline situations for impacts in respect to regulations as it facilitates in defining the scope of the assessment. The scope provides the outline of the project and the different factors that needs to be considered while evaluating the baseline. The baseline is developed based on the different regulatory factors that needs to be considered while developing the assessment tool (Kelleher et al., 2015). The lack of accurate baseline situation will result in erroneous impact analysis as the regulations have been accounted for in the baseline study. This also facilitates in developing key indicators that is critical in proper baseline measurements. The different boundaries and limitation of the project are defined by the regulations and it facilities in developing an effective baseline model.

The elements of a baseline study are defined on the type of method the study is using and the result that has to be obtained. The key indicators are chosen based on the objectives and regulations in impact studies so that accurate baselines can be developed. The different elements of baseline consists of baseline surveys, performance monitoring, survey design and questionnaires (Butt et al., 2014). The survey and questionnaire are the instruments used to collect relevant data for impact studies, the baseline surveys identifies the different baselines set as per the regulations of the operating environment and the baseline model are formed by combining these indicators to monitor and measure impact and performances.

References

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Boadway, R. (2016). Cost-benefit analysis. In The Oxford Handbook of Well-Being and Public Policy (p. 1569). Oxford University Press.

Butt, T. E., Gouda, H. M., Baloch, M. I., Paul, P., Javadi, A. A., &Alam, A. (2014). Literature review of baseline study for risk analysis—the landfill leachate case. Environment international, 63, 149-162.

Coates IV, J. C. (2014). Cost-Benefit Analysis of Financial Regulation: Case Studies and Implications. Yale LJ, 124, 882.

Hastings, N. A. J. (2015). Cost–Benefit Analysis. In Physical Asset Management (pp. 239-248). Springer, Cham.

Hauk, S., Knoke, T., & Wittkopf, S. (2014). Economic evaluation of short rotation coppice systems for energy from biomass—a review. Renewable and sustainable energy reviews, 29, 435-448.

Jit, M., & Mibei, W. (2015). Discounting in the evaluation of the cost-effectiveness of a vaccination programme: A critical review. Vaccine, 33(32), 3788-3794.

Kelleher, M., Culliane, C., Galvin, A. D., Murray, D., Hourihane, J. O., & BASELINE Team. (2015). Early life Transepidermal Water Loss (TEWL) values as a predictor of food allergy and sensitisation at 2 years: results from the BASELINE Study. Clinical and translational allergy, 5(S3), O2.

Rose, J. S., Shone, M. C., &Espiner, S. R. (2014). The relationship between marine tourism and marine protection: A baseline study of Akaroa, New Zealand.

Sanders, G. D., Neumann, P. J., Basu, A., Brock, D. W., Feeny, D., Krahn, M., ... & Salomon, J. A. (2016). Recommendations for conduct, methodological practices, and reporting of cost-effectiveness analyses: second panel on cost-effectiveness in health and medicine. Jama, 316(10), 1093-1103.

Santatiwongchai, B., Chantarastapornchit, V., Wilkinson, T., Thiboonboon, K., Rattanavipapong, W., Walker, D. G., ... & Teerawattananon, Y. (2015). Methodological variation in economic evaluations conducted in low-and middle-income countries: information for reference case development. PLoS One, 10(5), e0123853.

Shih, Y. H., & Tseng, C. H. (2014). Cost-benefit analysis of sustainable energy development using life-cycle co-benefits assessment and the system dynamics approach. Applied energy, 119, 57-66.Freeman III, A. M., Herriges, J. A., & Kling, C. L. (2014). The measurement of environmental and resource values: theory and methods. Routledge.

Springmann, M., Godfray, H. C. J., Rayner, M., & Scarborough, P. (2016). Analysis and valuation of the health and climate change cobenefits of dietary change. Proceedings of the National Academy of Sciences, 113(15), 4146-4151.

Van der Wee, M., Verbrugge, S., Sadowski, B., Driesse, M., &Pickavet, M. (2015). Identifying and quantifying the indirect benefits of broadband networks for e-government and e-business: A bottom-up approach. Telecommunications Policy, 39(3), 176-191.