Cost Benefit Analysis [ECON 453]
Dr. T.M. Horbulyk
April 2, 2012
1. Based on the article, describe as best you can:
(i) The reference group for the cost benefit analysis
Reference group for the cost benefit analysis (CBA) refers to the set of persons whose gains and losses are to be included as directly relevant to the project decision-making process. It is a sub set of people who will be benefited or affected by the implementation of the project. In the case of Bolu Mountain Tunnel project, the set of people who will directly benefit from the ...view middle of the document...
Where as in summative analysis, the project design is exogenous to the decision making of the analyst and the analyst compares one or more alternatives defined by someone else. In the case of CBA of Bolu Mountain Tunnel, it is a summative analysis because the design of the tunnel is some thing that lies outside the influence of the CBA analyst.
(v) ex ante or ex post
Any CBA can be either ex ante or ex post analysis depending on the timing of the analysis being under taken relative to the implementation of the project. Any CBA carried out before the implementation of a policy or project is an ex ante analysis and similarly the CBA undertaken after the implementation of the project is ex post. Since the relevant project of Bolu Mountain Tunnel has already been implemented and opened for the use by public, this particular CBA is an ex post analysis.
(vi) social or private CBA
Social and private CBA differ incisively in their reference group, though there are major differences in the way they are calculated as well. While some social groups will typically make up the reference group of the social CBA, that for private CBA will typically be some narrowly defined agents such as share holders of a firm and so on. Since this project pertains to the overall society and is not limited to the scope of any individual firm, it is a social cost benefit analysis.
2 (a) Briefly describe the major categories of expected benefits and expected costs from undertaking the project, as explained by the author.
Based on the article, the expected benefits from undertaking the project can be categorized into three headings and they are accident cost savings, vehicle operating cost savings and travel time savings. Accident cost savings incorporates all the benefits that result from the reduction in accidents due to better driving conditions. The major components of this savings are the reductions of the opportunity cost to the society resulting from the loss of productive factor in labor involved in the accidents and the material damage costs from the accidents. To account for the reduction of personal injuries and deaths due to the project implementation and monetize the value of this expected benefit, the loss of production approach is employed. Similarly, vehicle operating cost savings includes benefits derived by the individuals traveling in better conditions that occur due to expected reductions in roughness of pavements as a result of pavement improvements. According to the author, this will reduce the operating cost of vehicle and depreciation of the vehicle, hence a benefit. The third category of expected benefit is the expected savings generated in travel time due to improved road conditions. To monetize this benefit, the authors have used variables such as traveler’s income, type of trip, day of the week and so on. Taking these variables and working them with the reduced travel distance time of 2.5 hours on average, the authors have monetized travel...