Welfare Economics

• Welfare economics is the study of how the structure of markets and the
allocation of economic goods and resources determines the overall well-
being of society.
• Welfare economics seeks to evaluate the costs and benefits of changes to
the economy and guide public policy toward increasing the total good of
society, using tools such as cost-benefit analysis and social welfare
functions.
• Income distribution
• Economic efficiency
• Welfare of the people
• It deals with how welfare can be defined, measured and evaluated for the
individuals or the society as a whole.
Pareto Efficiency:
When the economy is in a state of Pareto efficiency, social welfare is
maximized in the sense that no resources can be reallocated to make
one individual better off without making at least one individual worse
off.

Social Welfare maximization:

Multiple Pareto efficient arrangements of the distributions of wealth,
income, and production are possible. Moving the economy toward
Pareto efficiency might be an overall improvement in social welfare,
but it does not provide a specific target as to which arrangement of
economic resources across individuals and markets will actually
maximize social welfare.
Evaluation of Alternate Analysis:
Alternative analysis is the evaluation of the different choices available
to achieve a particular project management objective. It is an analytical
comparison of different factors like operational cost, risks, effectiveness
as well as the shortfalls in an operational capability. It requires different
tools such as life-cycle costing, sensitivity analysis, and cost-benefit
analysis.
PPP (Public Private Partner
Ships)
The term PPP was adopted by a number of development agencies
during the second half of the 1990s in order to describe „partnerships‟
between the public and the private sector, in for example, infrastructure
projects.

The PPP Programme seeks to engage companies and organisations in

promoting CSR in workplaces and supply chains (termed the „blue
sphere‟) and also outside the immediate corporate sphere, e.g. local
markets, sectors and communities (termed the „green sphere‟). Besides
these two types of partnerships, the Programme also supports
„innovative partnerships‟ that may operate in both spheres.
 Main Features Risk Transfers Access to Ownershi Comment
private finance p
Build • Government finances the Government Limited access Governm Suited to projects
Operate facility. • Private company bears the to private ent that involve a
Transfer builds the facility. • Private equity risk. • finance. significant
(BOT) company operates the Private investment and
facility on a concession. • company bears operating content.
At the end of the O&M the risks • Suitable for toll
concession the facility is associated roads. • Does not
transferred to the with the overcome shortage
government. construction. of State funding for
infrastructure
Build Own • Private company • Private Significant • Private Especially suitable
Operate finances the facility. • company infusion of company if government has a
Transfer Private company builds the assumes capital for until large infrastructure
(BOOT) facility. • Private company equity and construction transfer financing gap. •
operates the facility on a other and working Suited to projects
concession. • At the end of commercial capital for that involve a
the concession the facility risks. • Private operation and significant
is transferred to the company maintenance. investment/operati
government. • Also known assumes ng content. • Good
as DBFO in UK: Develop- construction solution for most
BuildFinance-Operate risk. projects.
Methods of Project Appraisal
• Economic Analysis
• Financial Analysis
• Market Analysis
Cost benefit Analysis
A cost-benefit analysis (CBA) is the process used to measure the benefits of a decision
or taking action minus the costs associated with taking that action.

The costs involved in a CBA might include the following:

•Direct costs would be direct labor involved in manufacturing, inventory, raw
materials, manufacturing expenses.
•Indirect costs might include electricity, overhead costs from management, rent,
utilities.
•Intangible costs of a decision, such as the impact on customers, employees, or
delivery times.
•Opportunity costs such as alternative investments, or buying a plant versus building
one.
•Cost of potential risks such as regulatory risks, competition, and environmental
impacts.
Benefits:
• Revenue and sales increases from increased production or new
product.
• Intangible benefits, such as improved employee safety and morale, as
well as customer satisfaction due to enhanced product offerings or
faster delivery.
• Competitive advantage or market share gained as a result of the
decision.

Limitations:
For very large projects with a long-term time horizon, a cost-benefit
analysis might fail to account for important financial concerns such as
inflation, interest rates, varying cash flows, and the present value of
money.
Social Cost Benefit Analysis:
SCBA also called economic analysis, is a methodology developed for
evaluating investment projects from the point of view of the society as a
whole.

• Used primarily for public investment

• SCBA aids in evaluating individual projects
• Spell out broad national economic objectives
• Allocation of resources to various sectors
• SCBA is concerned with tactical decision making within the framework of
broad strategic choices defined by planning at the macro level.
Social Costs:
Construction of a bridge on a river
• Loss of farms and houses
• Pollution due to construction
• Migration of labour from farming
• Small shops should be moved etc.
Difference between CBA and SCBA
CBA
Single objective
Private interest is kept in mind
Return of investment
Singular objective
SCBA
Objective towards economic benefits
Wider national interest is considered
Rate of return to be compared with social economy,
even generation differences are analysed
Divergent objectives
Life Cycle Costing
Life cycle costing, or whole-life costing, is the process of estimating how much
money you will spend on an asset over the course of its useful life. Whole-life
costing covers an asset’s costs from the time you purchase it to the time you it is
disposed.

Life Cycle costing Process. Expenses include:

1.Purchase
2.Installation
3.Operating
4.Maintenance
5.Financing (e.g., interest)
6.Depreciation
7.Disposal
Need of life cycle costing
• Choosing between alternatives
• To know the assets benefits
• Budgeting accurately
• The FIRR is an indicator to measure the financial return on investment of an
income generation project and is used to make the investment decision.
The general approach to calculating the FIRR has long been discussed and
seems well-established in such a way that the cash flow analysis induces
uniformly the FIRR. While this may hold true, a closer look at the FIRR from
a different investor’s point of view can result in a different implication for
the FIRR.
EIRR:Comparison of economic costs and benefits over certain period.
• Three types of project decisions:
• Choose the least-cost option for the same benefits,
• Choose the best among project alternatives,
• Determine economic viability of the single alternative.
• Factors considered in the assessment: Economic costs and benefits, Timing
of costs and benefits, Discount rate , Residue value