CostBenefit Analysis Workshop 2325 April 2012 Marita Manley GIZ Contents Objectives Illustrative example Types of costs and benefits Costs Benefits Marginal vs NonMarginal Change Whether to measure ID: 795557
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Slide1
Key Concepts: Measuring costs and benefits
Cost-Benefit Analysis Workshop
23-25 April 2012
Marita Manley, GIZ
Slide2Contents
Objectives
Illustrative example
Types of costs and benefits
Costs
Benefits
Marginal
vs
Non-Marginal Change
Whether to measure
Recap
Slide31. Objectives
Understand through examples:
Whose perspective?
Types of costs and benefits included in CBA
Why it is important to know whether changes are marginal or non-marginal
When to measure
Slide42. Illustrative Example
Soil erosion prevention program
Trains and equips farmers who occupy sloping lands, to implement a soil erosion prevention technique which is
planting tree crops and grasses in lines on sloping soils to prevent soil erosion
Objective of the project is to
sustain farmer yield,
possibly increase farmer revenue,
decrease river dredging costs
increase ecosystem health of rivers and coral
Slide5Soil Erosion Prevention Program
Slide6Total Costs = Explicit Costs + Implicit CostsTotal Benefits = Market Benefits + Non-Market Benefits
3. Types of Costs and Benefits
Slide7a) Costs
Slide8Explicit Costs
Costs of buying materials,
labour
, and machines to build project (accounting costs)
Purchased items needed for project
Soil erosion prevention example
Labour
costs of putting together training program and costs of trainers/extension workers
Travel expenses
Material costs (planting materials/inputs e.g.
fertilisers
)
Purchased or rented capital (any machines/tools)
Slide9Implicit Costs
Opportunity costs
Value of farmers’ time
training
implementing e.g. soil erosion prevention practices
Revenue otherwise generated from land used
e.g. to plant grass and tree crops
Rental value of tools/machines already owned
Non-market costs
Lost goods and services not sold by market
Slide10Measuring Costs
If we assume our project does not change market prices, we can use market prices to value inputs
Examples of data we would need for our soil erosion prevention program:
Wage rates to value
labour
– extension workers, farmer time in training and carrying out soil erosion prevention practices
Price of inputs e.g. planting materials,
fertiliser
Rental rate to value capital equipment (tools/machines)
Also, data on quantities needed:
Estimates for
labour
time spent by extension workers and farmers on training, farmer
labour
time spent on soil erosion prevention practices
Quantities of inputs
Slide11b) BENEFITS
Slide12Market Benefits
Benefits that directly accrue to society (consumers and producers) of a good/service purchased in markets
Soil erosion prevention example:
More sustained (lower rate of decrease in) crop yield due to less land degradation
Increased revenue from crops/trees grown that stop soil erosion
Less time and money spent on dredging river
Slide13Non-Market Benefits
Non-market benefits (and costs) come
from goods/services that aren’t purchased within a market
Soil erosion prevention example:
Preservation of ecosystem services provided by rivers and coral reefs due to less soil sedimentation and chemical leaching
Slide14Measuring Market Benefits
If we assume our project does not change market prices, we can use market prices to value inputs
Soil erosion prevention example:
Price
of crops whose yield is sustained due to less soil erosion
Price of crops grown (e.g. tree fruits) to stop soil erosion
Other data needed:
Lower cost of dredging river
Quantities of crops grown to stop soil erosion
Increase in quantity of crops grown after soil erosion prevention program compared to without
Slide15www.sprep.org/climate_change/pacc
Measuring Non-Market Benefits
Since these goods/services are not traded in a market, if they are large we can to use other techniques to infer the values.
Can use values measured elsewhere
Examples:
Willingness to pay
Travel Cost Models
Averting Behavior Models
Stated Preference Techniques
Slide164. Marginal
vs
Non-Marginal Changes
A change is marginal if it does not change price
Use price to value quantity
For example, $25/20kg bag of cabbage
The value of a change is price times the change in quantity
Slide17Non-Marginal Market Change
IMPORTANT
FOR LARGE SCALE PROJECTS: A change is non-marginal if it is big enough to change market prices. If we assume a large project will not change prices we are at risk of hugely underestimating or overestimating the net benefits of the project.
E.g. if a project has the effect of doubling cabbage production in Fiji, this may flood the
Sigatoka
, Suva and
Nadi
markets with cabbage which is likely to decrease the price, so we can no longer assume the price will continue to be 25 dollars per bag of cabbage nor a doubling of revenue for farmers.
We need a demand function for the market good – we need to know what will happen to price if we double cabbage production, we cannot assume the price will stay at 25 dollars/bag of cabbage.
Thus we need to estimate a demand function – in English, how would the price respond if we increase production
Slide18A
demand
f
unction
:
as
supply increases, price decreases
Slide195. When to measure
Larger projects, important projects, pilot projects and projects with attentive decision-makers should have priority in CBA efforts due to higher stakes
The cost of doing the analysis should be small relative to the cost of the project itself
Some costs and benefits aren’t worth capturing because they are either too small or too abstract (e.g. existence value of an obscure and tiny
mollusc
in the coral reef that may survive due to less soil erosion)
Some important aspects of the analysis may be hard or expensive to measure
For example, ecosystem services values of river and coral reef, amount of soil that is prevented from eroding
Where possible, borrow values from other studies or projects (e.g. universal soil loss equation
Slide20Thinking laterally
There is more than one way to skin a cat.
Because of data and resource limitations, we are often required to think of alternate ways to make measurements
E.g. the value of a new bridge
travel time (valued at average local wage) saved by working population?
value of new trade/business that it stimulates?
lower cost of vehicle repair due to not having to drive across a rocky river?
lower ongoing repair costs compared to rickety old bridge?
what was the main rationale for a new bridge?
Slide21When measuring is impossible?
Where it is not feasible to quantify some costs or benefits that may be important in monetary terms or this cannot be done with any precision, applying the CBA framework is still important and useful
ensures that all relevant costs and benefits are identified and properly considered as part of project appraisal/evaluation
clarifies particular areas of uncertainty and/or disagreement in project appraisal/evaluation.
Slide226. Recap
Objectives were to understand through examples:
Whose perspective?
Types of costs and benefits included in CBA
Why it is important to know whether changes are marginal or non-marginal
When to measure
Slide23www.sprep.org/climate_change/pacc
Key messages
Costs to be included in analysis can be categorised as:
Explicit
Implicit
Non-market is a type of implicit cost
Benefits to be included in analysis can be categorised as:
Market
Non-market
If a project is large relative to a domestic market, may be important to take into account non-marginal changes
Detail and accuracy of CBA should be proportional to size and importance of project. Large,
important or
pilot projects should usually have priority in CBA efforts. Also helps if the CBA will be paid attention by decision-makers.
Slide24T
ANGIO TUMAS/TENKYU TRU/THANK YOU/VINAKA VAKALEVU/SULANG/KO RABWA/TUBWA KOR/MALO 'AUPITO/FA'AFETAI TELE LAVA/MERCI BEAUCOUP/KIA MANUIA/KIAORA KOE/KOMOL TATA/FAKAUE LAHI/SI YU'US MA'ÅSE‘/TEKE RAOI/KALANGAN/FAKAFETAI
Thank you
Jonathan Bower
Resource Economist, Land Resources Division
Secretariat of the Pacific Community
jonathanb@spc.int
+679 337 0733 – ext 35425
lrdeconomics.wordpress.com
Also available from ‘information and networks’ tab at www.spc.int/lrd