Cba summary of case studies


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Cba summary of case studies

  1. 1. COST-BENEFIT ANALYSIS Overview of Case StudiesThese notes are only meant to provide a quick overview over the key points of the case studies we studied inclass. For the exam you should also look again at the class slides, your notes and the original documents. 1. Chicago Summer Olympics. 2. Iraq War 3. London congestion charge 4. Chicago Child-Parent Centers Early Education 5. Three Gorges Dam, China 6. Domestic oil drilling 7. The Clean Air Act 8. Homeland Security 9. Chickenpox Vaccination 10. Smoking in the Czech Republic 11. Second Avenue Subway For the exam, ignore studies 5 and 11 (3 Gorges Dam and NYC Second Avenue Subway)
  2. 2. 1. EVENTS - OLYMPICS Watkins SD, Anderson PL. The Likely Economic Impact of a Chicago 2016 Summer Olympics. AEG WorkingStudy Paper 2009-9What is thepurpose of the Study whether hosting the Olympics in Chicago min 2016 would make economic sensecost benefitanalysis?What are the Hosting the Olympics versus not hosting thempolicy options?What is theperspective? Both: City of ChicagoWho hasstanding?What are themain costs? Construction of stadia and venues, advertising, cateringHow are they Based on budget estimatescalculated?What are themain Revenues from visitors, athletes and journalists (spending on hotel, meals)impacts/benefits Tickets sales, sponsorships, advertisingconsidered inthe study? Projected number of visitor days x average spending per dayHow are theymeasured and + Multiplier effect (An increase in spending produces an increase in income and consumption greaterwhat than the initial amount spent)methodology isused to value Calculations account for substitution effect (tourists spending money in Chicago even without Olympics)them?What discount No discountingrate is used? Problem of Exaggerated “Economic Impact” Claims: a) Substitution Effect: Additional expenditure replaces another expenditure, not truly additional, e.g., just a shifting of economic activity, e.g. instead of family going to dinner and a movie they buy tickets to an Olympic event Underestimation of SE- True economic impact: only net benefits, i.e., dollars that would have been spent somewhere else or not at all. b) Multipliers:Other Tendency to use multipliers that overstate indirect impact of an event Only dollars that are spent in the local economy count. Chain stores and restaurants – large % of profits might go to HQ elsewhere Also, “Crowding Out” Effect: Visitors who might have visited Chicago as part of a regularly planned vacation may visit another destination to avoid Olympic crowds and prices Residents might leave temporarily for the same reasonAdditional Info Class slides – Class 3 – September 19
  3. 3. 2. IRAQ WAR Stiglitz J and L Bilmes. 2008. The Three Trillion Dollar War; The True Cost of the Iraq Conflict. WW Norton &Study Co.: New York, NY. Working paper version: is the ▫ Give an idea of the true cost of the war compared to estimates prior to the war ($1 trillion+ versus priorpurpose of the estimate of $50-60 billion)cost benefit ▫ Show main budgetary costs and main economic costsanalysis? ▫ Show distribution of cost over time - what are we paying for now versus what we will pay for later?What are the War versus no warpolicy options?What is theperspective? Financial and economic/social costs – US onlyWho has Iraqis have no standingstanding? Financial Costs 1. Military operations – Department of Defense Expenditures 2. Future operations - Costs estimated to be proportional to the number of troops scheduled to be deployed in Iraq from 2006-2010 3. US fatalities – Death benefits paid to families of deceased soldiers 4. Veterans care – VA expenditures per case projected into the future 5. Replenishment of military to original strengthWhat are the 6. Interest payments to support deficit financing of war – 2 scenarios – paid back within 5 years, not paidmain costs? back – 4% interest rateHow are theycalculated? + Economic Adjustments to above (mainly to account for costs borne by other than federal government, also for market distortions) + Macroeconomic Costs 1. Increase in Price of Oil ($25 a barrel before war to $50 in 2005, 20% of that price increase assumed due to Iraq war) 2. Increase in Defense expenditures 3. Increase in InsecurityWhat are themainimpacts/benefits Ex Ante benefits mostly not realized, not valued in the paperconsidered in • Supplies of oil, lower price of oilthe study? • Stability in the Middle East • Gratitude of IraqisHow are theymeasured and • Reduction in future terrorist attackswhat • Testing of military equipment (future sales)methodology isused to valuethem?What discount 4% , nominal , seems low, undervaluation of cost of capitalrate is used? Not considered: • All costs borne by other countriesDid the study • Military costsconsider all • Destruction of propertypossible costs • Loss of lifeand benefits or • All costs of increased securityis theresomething that • Increased costs of cross border flowscould be • Reduced investmentadded? • Consequences of loss of credibility • Value of reduced capability of responding to national security threats elsewhere in the worldAdditional Info Class Slides – Class 8 – November 7
  4. 4. 3. TRANSPORTATION – CONGESTION CHARGEStudy Leape J. 2006. The London congestion charge. Journal of Economic Perspectives, 20, 157-176What is thepurpose of the Compares costs and benefits of the London Congestion charge introduced in London in 2003cost benefitanalysis?What are the Charge vs. no chargepolicy options?What is theperspective?Who has City of London, all commutersstanding? • Administrative costsWhat are the • Cost of operating the scheme (turned out much higher than expected)main costs? • Setup costsHow are they • Traffic management costs (mainly increased bus service)calculated? Based on expenditure recordsWhat are the Time savings and reliability benefitsmain Reduced accidents (fewer cars)impacts/benefits Reduced CO2 emissionsconsidered inthe study? Impacts measured: • Changes in traffic entering Central LondonHow are theymeasured and • Number of tripswhat • Number of vehicle miles drivenmethodology is • Number of people switching to busesused to value • Impact on average speedthem? Valuation: Time saved per trip valued at wage rate, fuel cost saved at lower congestion rateWhat discount --rate is used?Other Good example of charge/tax imposed to reduce an externality (congestion)Additional Info Class Slides – Class 7 - October 31
  5. 5. 4. EARLY EDUCATION Reynolds AJ, Temple JA, Robertson DL, and EA Mann. 2011. Age 26 cost-benefit analysis of the Title IStudy Chicago Child-Parent Centers. Child Development, January/February 2011, Volume 82, Number 1, Pages 379–404 Tries to answer the following three main questions: ▫ Does participation in the CPC program continue to demonstrate high economic benefits relative toWhat is the costs?purpose of the ▫ Do the estimated economic benefits differ across the three components of the program (preschool,cost benefitanalysis? school-age, and extended-program participation)? ▫ Do economic benefits differ by child and family subgroups, including gender, parent education, family risk status, neighborhood poverty, and length of participation? • Children attending the CPC programWhat are the • Children attending the usual early childhood programs in preschool or kindergarten in thepolicy options? neighborhood Standing: both participants and society in general • Benefits to participants are for the child and parent attending the program (increased earnings capacity over the life course and the value to parents for the provision of part-day preschool)What is the • Benefits to the general public (averted expenditures for remedial education and child welfareperspective? spending by governments, reduced tangible and intangible expenditures to crime victims, reducedWho hasstanding? expenditures for mental health and substance abuse treatment, and increased tax revenues to governments associated with increased earnings) • Benefits to society: sum of benefits to program participants and the general public, including government savings.What are the • All outlays for staff, family and community support, administration, operations and maintenance,main costs? instructional materials, transportation and community services, school-wide services, school district support, capital depreciation and interest,How are they • Estimates derived from operational budgets of the Chicago Public Schoolscalculated? Impacts during early years of interventions difficult to quantify and monetize e.g. impacts at younger ages – social adjustment, increased ability to handle frustration, less acting out… Grades K through 12: Cost savings due to reduced rates of retention, lower need for special education classes, lower involvement in youth criminalityWhat are the Findings at ages 19+: Significantly higher rates of high school completion, and completion of more yearsmain of education - resulting in an increase in lifetime earnings, government tax revenue, lower crime ratesimpacts/benefits and costs, lower rate of substance abuse and smoking.considered inthe study? Lifetime earnings and tax revenues projected based on years of education (high school dropouts vs. highHow are they school graduates vs. college graduates)measured andwhatmethodology is Overall study design: Non-randomized, quasi control group (no randomization because of ethicalused to value concerns - proven effectiveness of intervention and intention to target participants most in need)them?What discount 3%, all benefits discounted to age 3 (=year 0) of the programrate is used? Extremely well funded and well-designed program, not all early education programs might show the sameOther level of impact.Additional Info Class Slides – Class 9 – November 14
  6. 6. 5. INFRASTRUCTURE - DAMS Morimoto R and C Hope. 2004. Applying a cost-benefit analysis model to the Three Gorges project inStudy China. Impact Assessment and Project Appraisal, 22, 205-220What is thepurpose of the CBA of Three Gorges Dam projectcost benefitanalysis?What are the Dam versus status quopolicy options?What is theperspective? Chinese governmentWho hasstanding? Construction costsWhat are the Operation and maintenancemain costs?How are they Valued based on original budget + high and low scenariocalculated? In addition – costs of negative impacts (see there) Positive Impacts • Power generation (+switch to clean power) • Economic growthWhat are the • Flood controlmainimpacts/benefits • Navigation improvementconsidered inthe study? Negative Impacts • Displacement of huge numbers of people (most recent estimate 6 million)How are they • Submersion of vast areas of fertile farmland;measured and • Vulnerability to sabotage and earthquakewhat • Likely deterioration of water quality, affecting fisheries and othersmethodology is • Loss of a great tourist attraction and antiquitiesused to valuethem? • Sedimentation likely to reduce power generation Valuation based on estimated quantities x unit costs (for details see slides). Minimum, most likely and max scenarios and Monte Carlo analysis for all variables.What discount 5%rate is used?Other Most of the negative impacts seems undervaluedAdditional Info NOT COVERED THIS SEMESTER
  7. 7. 6. OIL DRILLINGStudy Hahn R and P Passell. 2008. The economics of allowing more domestic oil drilling. AEI paper 08-21What is the CBA of allowing drilling in two areas in the US so far not open for oil drilling - Alaska’s Arctic National Wildlifepurpose of the Refuge (ANWR) and the Outer Continental Shelf (OCS)cost benefitanalysis? 1) Estimation of impact on US gasoline prices 2) Cost-benefit analysisWhat are the Drilling in ANWRA, OCS or both, compared to status quo (no drilling)policy options?What is theperspective? US/Societal perspectiveWho has Standing: US oil producers and consumersstanding? • Producers’ oil extraction and marketing costs • Loss of “Use value” - cost of not being able to use resources for other purposes such as hunting, bird watchingWhat are the • Loss of “Non-use value” – from perceived uniqueness of the resourcemain costs?How are they Production costs based on historical cost per barrelcalculated? Use value – gains from land use, employment, losses from negative impacts on air and water quality, resulting losses in tourism and degradation of animal habitats For non-use value use of the contingent valuation data from the Exxon Valdez oil spill for ANWR, assumed to be $0 for OCSWhat are the • Revenues going to producersmain • Domestic benefits to consumers associated with lower world oil pricesimpacts/benefits • Reduced economic costs of disruption associated with adjusting to rapid price fluctuationsconsidered in • Reduced expenditures on oil imports leading to reduced terrorist activities /destabilizing militarythe study? expenditures in the Middle East (not valued in the study)How are theymeasured and Valuation:what Revenues ($100 a barrel x barrels sold)methodology is Assumption that domestic production will reduce prices to consumers by 10%, reduction in disruption byused to value 5%.them?What discount One year snapshot, no discountingrate is used? Study biased toward showing benefit of drilling (study by conservative think tank – American Enterprise Institute) • Use of production cost and revenue estimates at opposite ends of spectrum (400% profit margin?) • Consumer savings inconsistent with results of first part of study (which show that drilling would haveOther essentially no impact on gasoline prices) • Complete undervaluation of social cost • Use of WTP (Exxon Valdez) for the non-use value…should use WTA which is much higher • No accounting for pollution/CO2 emission • Doesn’t include any value for predicted oil spillAdditional Info Class Slides – Class 10 – November 19
  8. 8. 7. ENVIRONMENT – CLEAN AIR ACT The Benefits and Costs of the Clean Air Act, 1970 to 1990. Executive SummaryStudy The Benefits and Costs of the Clean Air Act, 1970 to 1990. Appendix I. The Valuation of Health and Welfare Effects.What is the How do the overall health, welfare, ecological, and economic benefits of Clean Air Act programspurpose of the compare to the costs of these programs?cost benefitanalysis? Periodic CBAs of the Clean Air Act mandated by the 1990 CAA AmendmentWhat are the Implementation of Clean Air Act versus status quo (assumption that no air pollution controls werepolicy options? established beyond those in place prior to enactment of the 1970 Amendments).What is theperspective? US societyWho hasstanding? Direct Cost: • Cost of installing, operating, and maintaining pollution abatement equipment (mainly scrubbers in smoke stacks and catalytic converters in cars).What are the • In addition, design and implementation of regulations, monitoring compliance, and investments inmain costs? research and developmentHow are they Presented as annual costs: Amortized capital costs plus operating and maintenance costscalculated? + Indirect Cost: Increased production costs > higher consumer prices > lower demand > reduced output and employment Electricity generation (prices + 2-4%, demand -3-5%), other goods (vehicles, etc.) about 1% reduction in output Observed reduction in harmful emissions (SO2, NOX, CO) leading to improved air quality leading to improved health and mortality outcomes Specific health outcomes: Reduction in incidence of asthma, bronchitis, hypertension, heart disease,What are the elevated blood lead levels leading to reductions in IQ,mainimpacts/benefits To get from Air Quality to Health Effects:considered in 1. Development of “Concentration-response functions” to relate outdoor concentrations of harmfulthe study? substances to changes in the incidence of health effects and mortality 2. Estimation of the exposure of individuals to those air pollutantsHow are theymeasured and 3. Valuation of avoided human health risk by application of estimates from the literature - unit valueswhat per case avoidedmethodology isused to value Valuation: Either existing WTP or WTA estimates or Cost-of-Illlness (COI) estimatesthem? COI: present value (PV) costs of treating the illness over the years, as well as the PV of the stream of lost earnings related to the illness Usually COI values < WTP < WTA values since they exclude pain and suffering Lead levels: Negative effect on education level and incomeWhat discount 5%, with sensitivity analysis at 3% and 7%rate is used?OtherAdditional Info Class Slides – Class 10 – November 19
  9. 9. 8. HOMELAND SECURITY Mueller J and MG Stewart. 2011. Balancing the Risks, Benefits, and Costs of Homeland Security.Study Homeland Security Affairs, Vol. 7, Article 16 (August 2011).What is thepurpose of the Comparison of the cost of security measures with the benefits as tallied in lives saved and damagescost benefit avertedanalysis?What are the ‘Enhanced” security measures or doing nothingpolicy options?What is theperspective? USWho hasstanding?What are themain costs? Documented Increased annual expenditures on homeland security (on average +$75 billion a year)How are theycalculated?What are themain impacts/benefits Lives saved and damages avertedconsidered in Cost based on past terrorist attacks (eg., 9/11, London subway, failed Times Square bombing)the study?What discount Comparison of 1-year expenditures to 1-year benefits, no discountingrate is used? Annual cost spent on enhanced security measure Cost per Life Saved = ------------------------------------------------------------------------------------------------------------------------ Fatalities averted by enhanced security measure OR Fatalities before enhanced security measure x % risk reduction due to enhanced SM Several definitions of cost-effectiveness: 1. “A security measure is cost-effective if the benefit of the measure outweighs the cost of providing the security measures” = B>C = Net Benefit >0 According to that criterion: Enhanced expenditures seem excessive “To be deemed cost-effective the security measures would have to deter, prevent, foil or protect each year against 1,667 otherwise successful attacks that inflicted some $100 million in damage (more than 4 a day) or 167 attacks inflicting $1 billion in damage (nearly one every other day) “Other Generally accepted criterion for cost-effectiveness of security measures: 2. “Cost per life saved not exceeding $1–$10 million is typical as this provides a reasonably accurate reflection of societal considerations of risk acceptability and willingness to pay to save a life. If the annual cost per life saved exceeds $1–$10 million, such risk reduction expenditure is deemed to have failed a cost-benefit analysis and so is not cost-effective” (Viscusi) Even based on that criterion many of the security measures put in place do not qualify (exception hardened cockpit doors, passenger and crew sensitization) Problems with current Dept of Homeland Security approach: • Focus on worst case scenarios; • Addition, rather than multiplication of, the probabilities; • Assessment of relative, rather than absolute, risk; and • Inflation of terrorist capacities and the importance of potential terrorist targets Class Slides – Class 11 – November 28 Mueller J. 2008. The Quixotic Quest for Invulnerability: Assessing the Cost, Benefits, and Probabilities ofAdditional Info Protecting the Homeland. Prepared for presentation at the National Convention of the International Studies Association San Francisco, California March 26-29, 2008
  10. 10. 9. HEALTH - VACCINATION Zhou et al. 2008. An economic analysis of the universal varicella vaccination program in the United States.Study Journal of Infectious Diseases, 197: s156-164What is thepurpose of the CBA of recommendation to add a routine second dose of varicella vaccinecost benefitanalysis?What are the Routine immunization consisting of 2 doses of the vaccine versus 1 dose only versus no vaccinepolicy options?What is theperspective?Who has US Societystanding? 1. Direct costs (medical and non-medical)What are the 2. Societal: Direct costs + indirect effects, such as productivity changes for patients and caregivers)main costs?How are they Cost of vaccination + treatment of side-effectscalculated? • Vaccine incl. wastage factor of 10%, administration (doctors time) + cost of treating side effects of vaccine (1% of people vaccinated) • Caregiver’s travel to clinic (bus ticket and lost wages) Health care costs and income loss averted due to reduced incidence of disease Direct costs;What are the Health care costs associated with children or adults contracting varicella:mainimpacts/benefits In- and outpatient care - physician costs, costs of drugs, supplies, lab tests, etc from insurance databaseconsidered in Costs of institutional care for patients with long-term disability (costs $100,000 annually over 50 years)the study? Indirect costs:How are they 1. Economic value of life lost prematurely and permanent disability (discounted cost of future workmeasured and cost)what 2. Work time lost by adults who contract diseasemethodology is 3. Work time lost by parents who stay home because their children contract diseaseused to valuethem? Based on a decision tree analysis assigning probabilities to the different events 1. Estimation of burden of varicella disease without vaccination 2. … with 1 dose vaccination 3. …with 2 doses of vaccinationWhat discount 3%rate is used? Indicators for Cost-effectiveness/Cost-Utility Analysis (CEA/CUA) used for health interventions: 1. QALYs (Quality-Adjusted Life Years) often used to measure impact of a health intervention ($ per QALY saved) One year of life lived in perfect health is worth 1 QALY (1 Year of Life × 1 Utility = 1 QALY) A year of life lived in a state of less than this perfect health is worth less than one 2. DALYs (Disability-Adjusted Life-Years) Similar to QALYs, used mainly by World Bank and WHO to compare the burden of disease in different countries (number of healthy life years lost and number of years lived with disability) Cost results presented as $ per DALY averted)Other Immunization study - Results presented in a variety of ways: Cost-benefit – NPV, cost-benefit ratio Cost-effectiveness – Cost per case prevented and per life-year saved, Cost-utility - Cost per QALY saved 2-dose vaccination only beneficial when compared to no vaccine, Costs not justified compared to 1-dose vaccination even when indirect /societal costs are included negative NPV and bad benefit-cost ratio, high cost per QALY (>$100,000)Additional Info Class Slides – Class 11 – November 28
  11. 11. 10. HEALTH - SMOKINGStudy Arthur D. Little International, Inc. 2000. Public Finance Balance of Smoking in the Czech Republic.What is thepurpose of the To compare the cost and benefits of smoking in the Czech Republicanalysis?What are the Study does not consider alternatives, just compares annual costs and benefitspolicy options?What is the Czech Governmentperspective? Exclusive focus on financial impact of smoking - on government and government health insurance’sWho hasstanding? budget linesWhat are the Smoking related public finance costs (from budget)main costs? Direct and indirect health care costs (direct – smoker, indirect – others) • • Social costs related to higher morbidityHow are theycalculated? • Lost income tax due to early mortality • Fire induced costsWhat are the • Savings on housing for elderly, pension & soc. expenses due to early mortality of smokersmain • Health care costs savings due to early mortalityimpacts/benefits? • Customs duty , corporate income tax and VATHow are theymeasured • Excise tax (largest income sources)/valued Financial/budget costs 6.75%, corresponding to the interest rate on state bonds maturing in 4 years (unclear whether good rateDiscount rate? or not) Findings: • Smoking costs the state budget less per year in health care costs, etc. than the government collects in taxes and saves in retirement pensions and other government-provided services for the elderly • Thus conclusion that cigarette consumption is beneficial for the Czech Republic Main problems with this study: • Perspective: narrow focus on government expenditures, excludes large private/internal costs, cost to private employers • No alternatives - should compare to scenario without smoking • Definition of excise taxes as a benefit (only transfer, could be levied on something else) • Unfortunate wording and presentation in general (saving money from having people die early should not be presented as a positive externality) • Obvious agenda – study commissioned by Phillip Morris (80% market share in the CR) at a time when two anti-tobacco bills were being discussed in Parliament, one strengthening tobacco control measures and one proposing tobacco advertising restrictions Other studies on smoking usually include more costs, in particular internal costs (costs borne by the individual), very different results (Eg. Taylor D etal. 2004. The Price of Smoking. MIT Press): ▫ Estimation of the social cost of smoking about $40 per pack of cigarettes:Other ▫ $33 private cost: borne by the individual, primarily through a substantially shortened lifespan ▫ $5.50 quasi-external cost: borne by the smokers’ family through increased health costs, slightly lower wages and other factors ▫ $1.50 external cost: borne by society, and representing the net effect of things like taxes paid, Medicaid and Medicare payments, and Social Security received Studies on the cost of smoking usually fall into 2 categories a) Cost-of-illness studies • Social costs of treatment, prevention and law enforcement; losses of productivity related to morbidity and mortality; plus various measures of the quality of life-years lost • Usually clearly distinguish between social (external) and private (internal) costs • Individual acts rational in terms of internal costs, but external costs justify government intervention (tax = external costs) b) Studies based on theory of addiction • Assumes individuals underestimate their dependency and cost of reducing/eliminating addition, thus possibly justifying government intervention • “Government intervention, such as tax increases, leads to less consumption of an addictive substance and can help individuals to better assess eth cost of their addiction….” • > Excise tax should exceed smoking-related external costs Class Slides – Class 11 – November 28Additional Info
  12. 12. 11. TRANSPORTATION – SUBWAY CONSTRUCTION Second Avenue Subway: Draft Environmental Impact 1999. Chapter 20. URL at:Study Part of an Environmental Impact Study: Comparison of costs and benefitsWhat is thepurpose of the Environmental Impact Assessments (EIA) are interdisciplinary analyses of the natural, human health, andcost benefit socio-cultural effects which are expected to result from public and private sector actions such asanalysis? development projects. The purpose of these studies is to comprehensively inform decision makers and the affected public about both the proposed 4 options: 1. Do nothing 2. TSM: Small changes - Closer train spacing on Lexington Avenue line, bus priority lanes, Lower EastWhat are the Side bus improvementspolicy options? 3. Build alternative 1: Construction of New Upper East Side subway extension 4. Build alternative 2: Construction of New Upper East Side subway extension + light rail option on the Lower East SideWhat is theperspective? MTAWho has Standing: MTA and New York subway usersstanding?What are themain costs? Alternative 3 and 4: Excavation, structures, signals, power and subway cars Alternative 4: in addition, light rail train structures and trainsHow are they Based on construction budgets/ previous expenditurescalculated? • Reduced Subway Crowding, Faster and More Reliable Service on 2nd Avenue line • Reduced Peak Period Crowding and Less Delay on other lines (Lines No. 4, 5, 2 and 3.) • Reduced Off-Peak Standing - more passengers being able to get a seat (on Lexington No. 6 line)What are the • Faster and More Reliable Surface Transit Servicemainimpacts/benefitsconsidered in Other:the study? Reduced Auto and Taxi Travel ▫ Car Operating Costs AvoidedHow are they ▫ Parking Costs Avoidedmeasured and ▫ Taxi Fares Avoidedwhat ▫ Emission Reductions (CO, NO, HC, etc.)methodology is ▫ Noise Cost Avoidedused to valuethem? ▫ Accident Cost Avoided Travel time – time saved getting to and waiting for subway and time spent on subway costed using average NYC wage rate (Out-of-vehicle time valued at a higher rate than in-vehicle time). In addition - reduced crowding and standing – valued at % of wage rateWhat discount 2.65% (MTA) and 7% (Federal Transportation Authority)rate is used? Not included:Other Traffic interruption, congestion, effect on businesses, changes in property value along subway lineAdditional Info NOT COVERED THIS SEMESTER