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Ch08 Handout CBA

Ch08 Handout CBA

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Published by Katherine Sauer

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Categories:Types, School Work
Published by: Katherine Sauer on Jan 04, 2012
Copyright:Attribution Non-commercial

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07/10/2014

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 Public Economics ± Dr. Sauer 
Chapter 8: Cost-Benefit AnalysisSuppose you are working for the Colorado state government in the highway department.- cost-benefit analysis of road repairsI. Measuring Current CostsWe need the social marginal cost.- equal to its opportunity cost
Cost of Asphalt:
1 bag asphalt costs $100- next best use = sell to someone else- competitive market- opportunity cost = price
Cost of Labor:
In a perfectly competitive market, the opportunity cost is equal to the wage.Suppose instead an imperfect market with some unemployment among construction workers. (due tominimum wage of $20)Suppose the value of one hour of leisure is $10.The opportunity cost of hiring an unemployed worker is $10. The opportunity cost of hiring anemployed worker is $20.Suppose we hire 500,000 previously unemployed workers and 500,000 previously employed workers.The opportunity cost of the labor is:
 
2Even though the government is paying out $20,000,000 in cash, the opportunity cost is $15,000,000.The cash cost of the labor cost has two parts:- opportunity cost- transfer of rentsRents are payments to resource acquisition that exceed those necessary to employ the resource.In this case the rents are a transfer from the government to previously unemployed workers.II. Measuring Future CostsUse the Present Discounted Value.The PDV of a
long-term
stream of payments is:PDV = payment amountinterest rateUse 7% as the interest rate.III. Measuring Current Benefits
V
aluing Driving Time Saved:
arious Approaches:
- wages (2009 average wage $19.29)- overstate if value of leisure < wage (can¶t work overtime)- understate if there are non-monetary aspects of the job- Contingent Valuation (ask individuals to value an option that they are not currently doing)- reveled preference (let individual¶s actions reveal their value)- gas station natural experimentLet¶s use $19.00 as the value of an hour of time.
V
aluing a life saved:
arious Approaches
:- wages- a worker under age 50 will spend 10-20% of all future hours working- value of life is 5-10 times future lifetime earnings

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