Semester 2, 2007-08

EC5324 Economics & Cost-Benefit Analysis

Instructor: Lim Boon Tiong (AS-2 #05-08) Ph: 6516-6023; e-mail: ecslimbt@nus.edu.sg

The aim of this course is to introduce the concepts and methods that are central to the economic appraisal of projects. Special attention will be given to the evaluation of projects or policies in the public sector where commercial profitability does not correspond to economic (social) profitability because of externalities, missing markets, and so on. While the course will emphasize methodology, there will be a discussion of a range of applications in areas such as environmental issues, recreation, health and safety, transportation projects, education, etc. Main Textbook: Boardman, Anthony, David Greenberg, Aidan Vining, and David Weimer, Cost-Benefit Analysis: Concepts and Practice. Third edition, Prentice-Hall, Upper Saddle River, N.J., 2006 (referred to below as ‘Text’). Supplementary Textbook: E J Mishan and E Quah, Cost Benefit Analysis. Fifth edition, Routledge, Abingdon, Oxon, 2007 Y K Ng, Welfare Economics: Towards a More Complete Analysis. Palgrave, New York, 2004 J A Sinden and D J Thampapillai, Introduction to Benefit-Cost Analysis, Longman Australia, 1995. Mode of Learning: Lectures Class Discussions Tutorial Exercises

Course Organisation and Assessment Assessment: Project/Term Paper: 40% Final exam: 50% Tutorial assignments: 10% Schedule / Topics The main readings from the course will be specific pages from the main textbook (details will be provided in class). The other items listed below are mostly for

reference, though material from some of them may be assigned as compulsory reading later. Additional references may be provided during class meetings. Week-1 Introduction: The nature of Economic Evaluation and Scope of

CBA Text, Chapter 1.

Mishan & Quah (2007), Part I Richard O Zerbe, “Is Cost-Benefit Analysis Legal? Three Rules”, Journal of Policy Analysis and Management, Vol 17(3): 419-456, 1998 Economic Focus, “The regulators’ best friend?”, The Economist, Mar 31, 2005. Hahn, Robert W. and Cass R Sunstein, “The Precautionary Principle as a Basis for Decision Making”, The Economists' Voice: Vol. 2: No. 2, 2005. (http://www.bepress.com/ev/vol2/iss2/art8/) Katie Steele, “The precautionary principle: a new approach to public decision-making?”, Law, Probability and Risk, Vol 5, 2006, pp 19-31.

Week-2 Conceptual Foundations of Cost-Benefit Analysis Text, Chapters 2, 3.

Mishan & Quah (2007), Part II Arnold C Harberger, “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay”, Journal of Economic Literature, Sep 1971, pp 785-97. Robert Willig, “Consumer’s Surplus Without Apology”, American Economic Review, Sep 1976, pp 589-97.

Week-3 Valuation of Benefits and Costs in Primary Markets

Text, Chapter 4.

Week-4 Valuation of Benefits and Costs in Secondary markets Text, Chapter 5.

Mishan & Quah (2007), Part IV Week-5 Discounting Future Benefits and Costs Text, Chapter 6.

Mishan & Quah (2007), Part V Week-6 The Social Discount Rate Text, Chapter 10.

David F Bradford, “Constraints on Government Investment Opportunities and the Choice of Discount Rate”, American Economic Review, Dec 1975, pp 887-99. Mark Moore, et al, “‘Just give me a number!’ Practical values for the Social Discount Rate”, Journal of Policy Analysis and Management, Vol 23, No 4, Autumn 2004 Coleman Bazelon and Kent Smetters, “Discounting inside the Washington D.C. Beltway”, Journal of Economic Perspectives, Vol 13, No 4, Autumn 1999

Week-7 Dealing with Uncertainty: Expected Value and Sensitivity Analysis,

and the value of information Text, Chapter 7

K Balcombe and L Smith, “Refining the Use of Monte Carlo Techniques for Risk Analysis in Project Planning”, Journal of Development Studies, Vol 36 No 2, Dec 1999, pp 113-35.

Week-8 Option Price and Option Value, and Existence Value Text, Chapters 8 & 9

Kenneth Arrow and Anthony Fisher, “Environmental Preservation, Uncertainty, and Irreversibility”, Quarterly Journal of Economics, Vol 88 No 2, May 1974, pp 312-319 Jon Conrad, “Quasi-Option Value and the Expected Value of Information”, Quarterly Journal of Economics, Vol 94 No 4, Jun 1980, pp 813-820. Anthony Fisher and W Michael Hanemann, “Quasi-Option Value: Some Misconceptions Dispelled”, Journal of Environmental Economics and Management, Vol 14, 1987, pp 183-190.

Week-9 Valuing non-priced Impacts: Revealed Preference Methods Text, Chapter 13.

Sherwin Rosen, “Hedonic Prices and Implicit Markets: Product Differentiation in Pure Competition”, Journal of Political Economy, Vol 82 No 1, pp 34-55’

Week-10 Contingent Valuation Methods Text, Chapter 14.

Paul Portney, “The contingent valuation debate: Why economists should care”, Journal of Economic Perspectives, Vol 8 No 4, Autumn 1994. Peter Diamond and Jerry Hausman, “Contingent valuation: Is some number better than no number?”, Journal of Economic Perspectives, Vol 8 No 4, Autumn 1994. Knut Veisten, “Contingent valuation controversies: Philosophic debates about economic theory”, Journal of Socio-Economics, Vol 36, 2007, pp 204-232.

Week-11 Shadow prices, the Marginal Excess Tax Burden

Text, Chapter 15, Chapter 12, pp. 320-21 W Kip Viscusi and Joseph Aldy, “The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World”, Journal of Risk and Uncertainty, Vol 27 No 1, 2003, pp 5-76.

Week-12 Shadow prices in the Developing Country Context Text, Chapter 16

Mishan & Quah (2007), Part III Asian Development Bank, Guidelines for the Economic Analysis of Projects,1997. (http://www.adb.org/Documents/Guidelines/Eco_Analysis/default.asp) Glenn P Jenkins, “Project Analysis and the World Bank”, American Economic Review, Vol 87 No 2, May 1997

Raaj K Sah and Joseph Stiglitz, “The Social Cost of Labor and Project Evaluation: A General Approach”, Journal Of Public Economics, Vol 28, 1985, pp 135-163. Alejandra Edwards, “Labor Supply Price, Market Wage, and the Social Opportunity Cost of Labor”, Economic Development and Cultural Change, Vol 38 No 1, Oct 1989, pp 31-43.

Week-13 Review