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Text of the page (random words):
at dupuit was not suggesting that the government perfectly price discriminate and charge each user exactly what they would pay rather their willingness to pay provided a theoretical foundation on the societal worth or benefit of a project the cost of the project proved much simpler to calculate simply taking the sum of the materials and labor in addition to the maintenance afterward would give one the cost now the costs and benefits of the project could be accurately analyzed and an informed decision could be made the corps of engineers initiated the use of cba in the us after the federal navigation act of 1936 mandated cost benefit analysis for proposed federal waterway infrastructure 11 the flood control act of 1939 was instrumental in establishing cba as federal policy requiring that the benefits to whomever they accrue be in excess of the estimated costs 12 more recently cost benefit analysis has been applied to decisions regarding investments in cybersecurity related activities e g see the gordon loeb model for decisions concerning cybersecurity investments 13 public policy edit cba s application to broader public policy began with the work of otto eckstein 14 who laid out a welfare economics foundation for cba and its application to water resource development in 1958 it was applied in the us to water quality 15 recreational travel 16 and land conservation during the 1960s 17 and the concept of option value was developed to represent the non tangible value of resources such as national parks 18 cba was expanded to address the intangible and tangible benefits of public policies relating to mental illness 19 substance abuse 20 college education 21 and chemical waste 22 in the us the national environmental policy act of 1969 required cba for regulatory programs since then other governments have enacted similar rules government guidebooks for the application of cba to public policies include the canadian guide for regulatory analysis 23 the australian guide for regulation and finance 24 and the us guides for health care 25 and emergency management programs 26 transportation investment edit cba for transport investment began in the uk with the m1 motorway project and was later used for many projects including the london underground s victoria line 27 the new approach to appraisal nata was later introduced by the department for transport environment and the regions this presented balanced cost benefit results and detailed environmental impact assessments nata was first applied to national road schemes in the 1998 roads review and was subsequently rolled out to all transport modes maintained and developed by the department for transport it was a cornerstone of uk transport appraisal in 2011 the european union s developing harmonised european approaches for transport costing and project assessment heatco project part of the eu s sixth framework programme reviewed transport appraisal guidance of eu member states and found significant national differences 28 heatco aimed to develop guidelines to harmonise transport appraisal practice across the eu 29 transport canada promoted cba for major transport investments with the 1994 publication of its guidebook 30 us federal and state transport departments commonly apply cba with a variety of software tools including hers bca net statbencost cal bc and tredis guides are available from the federal highway administration 31 32 federal aviation administration 33 minnesota department of transportation 34 california department of transportation caltrans 35 and the transportation research board s transportation economics committee 36 accuracy edit in health economics cba may be an inadequate measure because willingness to pay methods of determining the value of human life can be influenced by income level variants such as cost utility analysis qaly and daly to analyze the effects of health policies may be more suitable 37 38 for some environmental effects cost benefit analysis can be replaced by cost effectiveness analysis this is especially true when one type of physical outcome is sought such as a reduction in energy use by an increase in energy efficiency using cost effectiveness analysis is less laborious and time consuming since it does not involve the monetization of outcomes which can be difficult in some cases 39 it has been argued that if modern cost benefit analyses had been applied to decisions such as whether to mandate the removal of lead from gasoline block the construction of two proposed dams just above and below the grand canyon on the colorado river and regulate workers exposure to vinyl chloride the measures would not have been implemented although all are considered highly successful 40 the us clean air act has been cited in retrospective studies as a case in which benefits exceeded costs but knowledge of the benefits attributable largely to the benefits of reducing particulate pollution was not available until many years later 40 process edit a generic cost benefit analysis has the following steps 41 define the goals and objectives of the action list alternative actions list stakeholders dubious discuss select measurement s and measure all cost and benefit elements predict outcome of costs and benefits over the relevant time period convert all costs and benefits into a common currency apply a discount rate usually a specific social discount rate calculate the net present value of actions under consideration perform sensitivity analysis adopt the recommended course of action in united states regulatory policy cost benefit analysis is governed by omb circular a 4 evaluation edit cba attempts to measure the positive or negative consequences of a project a similar approach is used in the environmental analysis of total economic value both costs and benefits can be diverse costs tend to be most thoroughly represented in cost benefit analyses due to relatively abundant market data the net benefits of a project may incorporate cost savings public willingness to pay implying that the public has no legal right to the benefits of the policy or willingness to accept compensation implying that the public has a right to the benefits of the policy for the policy s welfare change the guiding principle of evaluating benefits is to list all parties affected by an intervention and add the positive or negative value usually monetary that they ascribe to its effect on their welfare the actual compensation an individual would require to have their welfare unchanged by a policy is inexact at best surveys stated preferences or market behavior revealed preferences are often used to estimate compensation associated with a policy stated preferences are a direct way of assessing willingness to pay for an environmental feature for example 42 survey respondents often misreport their true preferences however and market behavior does not provide information about important non market welfare impacts revealed preference is an indirect approach to individual willingness to pay people make market choices of items with different environmental characteristics for example revealing the value placed on environmental factors 43 the value of human life is controversial when assessing road safety measures or life saving medicines controversy can sometimes be avoided by using the related technique of cost utility analysis in which benefits are expressed in non monetary units such as quality adjusted life years road safety can be measured in cost per life saved without assigning a financial value to the life however non monetary metrics have limited usefulness for evaluating policies with substantially different outcomes other benefits may also accrue from a policy and metrics such as cost per life saved may lead to a substantially different ranking of alternatives than cba in some cases in addition to changing the benefit indicator the cost benefit analysis strategy is directly abandoned as a measure in the 1980s to ensure workers safety the us supreme court made an important decision to abandon the consideration of return on investment and instead seek the lowest cost benefit to meet specific standards 44 another metric is valuing the environment which in the 21st century is typically assessed by valuing ecosystem services to humans such as air and water quality and pollution 45 monetary values may also be assigned to other intangible effects such as business reputation market penetration or long term enterprise strategy alignment time and discounting edit cba generally attempts to put all relevant costs and benefits on a common temporal footing using time value of money calculations this is often done by converting the future expected streams of costs c displaystyle c and benefits b displaystyle b into a present value amount with a discount rate r displaystyle r and the net present value defined as npv t 0 b t c t 1 r t displaystyle text npv sum _ t 0 infty b_ t c_ t over 1 r t the selection of a discount rate for this calculation is subjective a smaller rate values the current generation and future generations equally larger rates a market rate of return for example reflects human present bias or hyperbolic discounting valuing money which they will receive in the near future more than money they will receive in the distant future empirical studies suggest that people discount future benefits in a way similar to these calculations 46 the choice makes a large difference in assessing interventions with long term effects an example is the equity premium puzzle which suggests that long term returns on equities may be higher than they should be after controlling for risk and uncertainty if so market rates of return should not be used to determine the discount rate because they would undervalue the distant future 47 methods for choosing a discount rate edit for publicly traded companies it is possible to find a project s discount rate by using an equilibrium asset pricing model to find the required return on equity for the company and then assuming that the risk profile of a given project is similar to that the company faces commonly used models include the capital asset pricing model capm r r f β e r m r f displaystyle r r_ f beta left mathbb e r_ m r_ f right and the fama french model r r f risk free rate β m e r m r f market risk β s m b e r s e r b size factor β h m l e r h e r l value factor displaystyle r underbrace r_ f _ text risk free rate beta _ m underbrace left mathbb e r_ m r_ f right _ text market risk beta _ smb underbrace left mathbb e r_ s mathbb e r_ b right _ text size factor beta _ hml underbrace left mathbb e r_ h mathbb e r_ l right _ text value factor where the β i displaystyle beta _ i terms correspond to the factor loadings a generalization of these methods can be found in arbitrage pricing theory which allows for an arbitrary number of risk premiums in the calculation of the required return risk and uncertainty edit risk associated with project outcomes is usually handled with probability theory although it can be factored into the discount rate to have uncertainty increasing over time it is usually considered separately particular consideration is often given to agent risk aversion preferring a situation with less uncertainty to one with greater uncertainty even if the latter has a higher expected return uncertainty in cba parameters can be evaluated with a sensitivity analysis which indicates how results respond to parameter changes a more formal risk analysis may also be undertaken with the monte carlo method 48 however even a low parameter of uncertainty does not guarantee the success of a project principle of maximum entropy edit main article principle of maximum entropy suppose that we have sources of uncertainty in a cba that are best treated with the monte carlo method and the distributions describing uncertainty are all continuous how do we go about choosing the appropriate distribution to represent the sources of uncertainty one popular method is to make use of the principle of maximum entropy which states that the distribution with the best representation of current knowledge is the one with the largest entropy defined for continuous distributions as h x e log f x s f x log f x d x displaystyle h x mathbb e left log f x right int _ mathcal s f x log f x dx where s displaystyle mathcal s is the support set of a probability density function f x displaystyle f x suppose that we impose a series of constraints that must be satisfied f x 0 displaystyle f x geq 0 with equality outside of s displaystyle mathcal s s f x d x 1 displaystyle int _ mathcal s f x dx 1 s r i x f x d x α i i 1 m displaystyle int _ mathcal s r_ i x f x dx alpha _ i quad i 1 m where the last equality is a series of moment conditions maximizing the entropy with these constraints leads to the functional 49 j max f s f log f λ 0 f i 1 m λ i r i f d x displaystyle j max _ f int _ mathcal s left f log f lambda _ 0 f sum _ i 1 m lambda _ i r_ i f right dx where the λ i displaystyle lambda _ i are lagrange multipliers maximizing this functional leads to the form of a maximum entropy distribution f x exp λ 0 1 i 1 m λ i r i x displaystyle f x exp left lambda _ 0 1 sum _ i 1 m lambda _ i r_ i x right there is a direct correspondence between the form of a maximum entropy distribution and the exponential family examples of commonly used continuous maximum entropy distributions in simulations include uniform distribution no constraints are imposed over the support set s a b displaystyle mathcal s in a b it is assumed that we have maximum ignorance about the uncertainty exponential distribution specified mean e x displaystyle mathbb e x over the support set s 0 displaystyle mathcal s in 0 infty gamma distribution specified mean e x displaystyle mathbb e x and log mean e log x displaystyle mathbb e log x over the support set s 0 displaystyle mathcal s in 0 infty the exponential distribution is a special case normal distribution specified mean e x displaystyle mathbb e x and variance var x displaystyle text var x over the support set s displaystyle mathcal s in infty infty if we have a specified mean and variance on the log scale then the lognormal distribution is the maximum entropy distribution cba under us administrations edit the increased use of cba in the us regulatory process is often associated with president ronald reagan s administration although cba in us policy making dates back several decades reagan s executive order 12291 mandated its use in the regulatory process after campaigning on a deregulation platform he issued the 1981 eo authorizing the office of information and regulatory affairs oira to review agency regulations and requiring federal agencies to produce regulatory impact analyses when the estimated annual impact exceeded 100 million during the 1980s academic and institutional critiques of cba emerged the three main criticisms were 50 that cba could be used for political goals debates on the ...