QUEEN’S UNIVERSITY

DEPARTMENT OF ECONOMICS

COST-BENEFIT ANALYSIS

Economics 437 / Economics 837

Spring 2015

Instructor: Chun-Yan George Kuo

Office: MC A518

e-mail: kuoc@econ.queensu.ca or

chunyankuo@gmail.com

TA: Wing Feng

Office: Dun 311

e-mail: fengy@econ.queensu.ca

Course Description

This course covers the economic aspects of cost-benefit analysis, and examines how an economic assessment fits into other parts of the analysis. The analysis includes the financial, economic, stakeholder and risk components. The emphasis will be on the use of economic theory to measure the benefits and costs of projects. Applications to infrastructure investments such as roads, satellite and electricity will be elaborated. Investments in the social sectors such as education and health will also be discussed. In addition, the course will cover the theory and measurement of the economic opportunity cost of public funds, the economic cost of foreign exchange, and the measurement of the economic opportunity cost of labor.

Requirements

The course will require the completion of 5 problem sets plus a final exam.

Grading

20% of your grade will be based on your performance in the completion of the problem sets, and 80% will be determined by your performance on the final exam.

Final Exam

The final exam will be held on June 18 at 9:00 am – 12:00 noon.

Schedule

The class will meet 1:00 pm to 4:00pm, Tuesdays and Wednesdays from May 5 to June 10. Office hours will be 9:00 to 11:00am on Wednesdays. There will normally be a tutorial from 10:30 to 11:30 on Monday at DUNNING 350.

Course Materials

The course materials are available on the net or sent by email.

Other references: Belli, et al, Economic Analysis of Investment Operations, The World Bank, (2001); Boardman/Greenberg/Vining/Weimer, Cost-Benefit Analysis: Concepts and Practice, Prentice Hall, (2001).

Course Outline

Class	Date	Subject
1	May 5 (Tuesday)	Cost-Benefit Analysis -- An Integrated Approach · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 1: The Integrated Analysis,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 2: A Strategy for the Appraisal of Investment Projects,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · John Deutsch International, Queen’s University, “RASCOM: Executive Summary of Project Feasibility Study,” (October 2005). Supplementary Reading · Jenkins, G.P., “Project Analysis and the World Bank”, American Economic Review, (May 1997), pp. 38-42.
2	May 6 (Wednesday)	Principles underlying the Economic Analysis of Projects · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 7: Principles Underlying the Economic Analysis of Projects,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). Supplementary Reading · Harberger, A.C., “Three Basic Postulates for Applied Welfare Economics: An Interpretive Essay”, Journal of Economic Literature, vol. 9, issue 3, (September 1971), pp. 785-797. · Harberger, A.C., “Microeconomics”, The Concise Encyclopedia of Economics, Library of Economics and Liberty, (2008). Problem Set 1 (Due May 13)
3	May 12 (Tuesday)	Alternative Investment Criteria, Optimal Timing, Scale and Length of Project Life · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 4: Discounting and Alternative Investment Criteria,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 5: Scale, Timing, Length and Inter-Dependencies in Project Selection,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014).
4	May 13 (Wednesday)	The Economic Opportunity Cost of Capital · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 8: The Economic Opportunity Cost of Capital,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Jenkins, G.P. and Kuo, C.Y., “The Economic Opportunity Cost of Capital for Canada: An Empirical Update”, in D.F. Burgess and G.P. Jenkins, (eds.), Discount Rates for the Evaluation of Public Private Partnerships, McGill-Queen’s University Press, (2010). Supplementary Reading · Kuo, C. Y., Jenkins, G.P. and Mphahlele, M.P., “The Economic Opportunity Cost of Capital for South Africa,” The South African Journal of Economics, Vol. 71:3, (September 2003), pp. 496-516. · Sjaastad, L.A. and Wisecarver, D.L., “The Social Cost of Public Finance,” Journal of Political Economy, Vol. 85, no. 3, (June 1977), pp.513-547. Problem Set 2 (Due May 20)
5	May 19 (Tuesday)	Development of Cash Flow (Resource) Statements · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 3: The Financial Analysis of Projects,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Harberger, A.C., “Chapter 2: Survey of Literature on Cost-Benefit Analysis for Industrial Project Evaluation,” Project Evaluation: Collected Papers, University of Chicago Press, (1976), pp. 42-48.
6	May 20 (Wednesday)	Economic Valuation of Tradable and Non-Tradable Goods and Services · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 10: Economic Prices for Tradable Goods and Services,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 11: Economic Prices for Non-Tradable Goods and Services,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). Problem Set 3 (Due May 27)
7	May 26 (Tuesday)	Shadow Price of Foreign Exchange and the Shadow Price of Non-Tradable Outlays · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 9: The Shadow Price of Foreign Exchange and Non-Tradable Outlays,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Harberger, A.C. and Jenkins, G.P. (edited), “Introduction,” in Cost-Benefit Analysis, Edward Elgar Publishing Limited, (2002). Supplementary Reading · Kuo, C.Y., Salci, S., and Jenkins, G.P., “Measuring the Foreign Exchange Premium and the Premium for Non-Tradable Outlays for 20 Countries in Africa,” The South African Journal of Economics, forthcoming.
8	May 27 (Wednesday)	The Economic Opportunity Cost of Labor · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 12: The Economic Opportunity Cost of Labor,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). Supplementary Reading · Bicak, H., Jenkins, G.P., Kuo, C. Y., and Mphahlele, M.P., “An operational guide to the Estimation of The Economic Opportunity Cost of Labour in South Africa,” The South African Journal of Economics, Vol. 72:5, (December 2004). Problem Set 4 (Due June 3)
9	June 2 (Tuesday)	Evaluation of Stakeholder Impact and Basic Needs Externalities · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 13: Evaluation of Stakeholder Impacts,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Jenkins, et al., “Chapter 14: Basic Needs Externalities,” Integrated Investment Appraisal: Concepts and Practice, (August 2008). Supplementary Reading · Harberger, A.C., “Basic Needs Versus Distributional Weights in Social Cost-Benefit Analysis,” Economic Development and Cultural Change 32, no.3, (April 1984), pp. 455-74.
10	June 3 (Wednesday)	Evaluation of Transportation and Electricity Projects · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 16: Cost-Benefit Analysis of Transportation Projects,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Harberger, A.C., “Chapter 9: Marginal Cost Pricing and Social Investment Criteria for Electricity Undertaking,” Project Evaluation: Collected Papers, University of Chicago Press, (1976), pp. 233-247. Supplementary Reading · Jenkins, G.P., Kuo, C.Y, and Harberger, A.C., “Chapter 19: An Integrated Appraisal of Combined-Cycle versus Single-Cycle Electricity-Generation Technologies,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (January 2015). Problem Set 5 (Due June 10)

11	June 9 (Tuesday)	Evaluation of Health and Education Projects · Jenkins, G.P., Kuo, C.Y., and Harberger, A.C., “Chapter 15: Cost Effectiveness Analysis,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Belli, et al., “Chapter 9: Economic Evaluation of Health Projects,” Economic Analysis of Investment Operations: Analytical Tools and Practical Applications, WBI Development Studies, World Bank Institute, World Bank, (2001). · Belli, et al., “Chapter 8: Economic Evaluation of Education Projects,” Economic Analysis of Investment Operations: Analytical Tools and Practical Applications, WBI Development Studies, World Bank Institute, World Bank, (2001). Supplementary Reading · Detsky, A.S. and Naglie, I.G., “A Clinician’s Guide to Cost-Effectiveness Analysis”, Annals of Internal Medicine, Vol. 113, No. 2, (1990), pp. 147-154.
12	June 10 (Wednesday)	Risk Analysis and Evaluation of Regulations · Jenkins, G.P., Kuo, C.Y, and Harberger, A.C., “Chapter 6: Dealing with Uncertainty and Risk in Project Appraisal,” Cost-Benefit Analysis for Investment Decisions, Queen’s University, (November 2014). · Treasury Board of Canada Secretariat, “Canadian Cost-Benefit Analysis Guide: Regulatory Proposals,” (2007). Supplementary Reading · Savvides, S., “Risk Analysis in Investment Appraisal,” Project Appraisal, (March 1994), pp. 3-18. · Jenkins, G.P., Kuo, C.Y., and Ozbafli, A., Cost-Benefit Analysis Case Study on Regulations to Lower the Level of Sulphur in Gasoline,” paper prepared for Treasury Board, Government of Canada, (March 2007). · Viscusi, W.K., “Monetizing the Benefits of Risk and Environment Regulation,” AEI-Brooking Joint Center for Regulatory Studies, Working Paper 06-09, (April 2006).