CostBenefit Analysis(2003版).pptVIP

Cost-Benefit Analysis Chapter 11 Contents Contents Cost-Benefit Analysis 1,How should the government decide whether or not to pursue a particular project ? The theory of welfare economics provides a framework for deciding:Evaluate the social welfare function before and after the project, and see whether social welfare increase.If it does,then do the project. 2,This method is correct, but not very useful.However,welfare economics does provide the basis for cost-benefit analysis(a set of practical procedures for guiding public expenditure decision.) Cost-benefit analysis is the practical use of welfare economics to evaluate potential projects. 3,Cost-benefit analysis allows policymakers allocate the resources to a project as long as the marginal social benefit exceeding the marginal social cost. Private sector project evaluation 1, The present value criteria: 1) A project is admissible only if its present value is positive. 2)When two projects are mutually exclusive,the preferred project is the one with the higher present value. 3)The calculations show the discount rate chosen is important.(Table 11.2) If the discount rate chosen is too high,it tends to discriminate against projects with returns that come in the relatively future and vice versa. Private sector project evaluation 2,internal rate of return: 1)We can generalize this procedure as follows:If a project yield a stream of benefits and costs over T periods,the internal rate of return (p)is defined as the p that solves the equation(p245 11.3).The internal rate of return is the discount rate that would make the present value of the project just equal to zero. 2)An obvious admissibility criterion is to accept a project if p exceed the firm’s opportunity cost funds r.If two mutually exclusive projects are both admissible,choose the one with the higher value of p. 3)In short, when projects differ in size,the internal rate of return can give poor guidance.(example,245)In contrast,the present value rule gives