PPA 691 – Policy Analysis

1. PPA 691 – Policy Analysis Lecture 7a-8a. Benefit-Cost Analysis

2. Types of Benefits and Costs • Inside (internalities) versus outside (externalities) benefits and costs. Focused on target group or jurisdiction. • Tangible (directly measurable) versus intangible (indirectly measurable) benefits and costs. Focus on known market prices or shadow price estimates.

3. Types of Benefits and Costs • Direct (primary) versus indirect (secondary) benefits and costs. Focuses on most highly valued program objectives. • Net efficiency versus redistributional benefits. Focuses on increases in net social welfare or transfers within society.

4. Tasks in Benefit-Cost Analysis • Problem structuring – formulation of the metaproblem by defining boundaries of goals, objectives, alternatives, criteria, target groups, costs, and benefits. • Specification of objectives – conversion of general aims (goals) into temporally specific and measurable aims (objectives).

5. Tasks in Benefit-Cost Analysis • Information search, analysis, and interpretation – Location, analysis, and interpretation of information needed to forecast the outcomes of specified policy alternatives. • Identification of target groups and beneficiaries – listing of all groups (stakeholders) that are a target of action (e.g., regulation) or inaction (status quo), or which will benefit from action or inaction.

6. Tasks in Benefit-Cost Analysis • Estimation of benefits and costs – Estimation in units of monetary value the specific benefits and costs of each alternative in all classes. • Discounting of benefits and costs – conversion of monetary benefits and costs into their present value on the basis of a specified discount factor.

7. Tasks in Benefit-Cost Analysis • Estimation of risk and uncertainty – use of sensitivity and a fortiori analysis to estimate probabilities that benefits and costs will occur in the future. • Choice decision criterion – choice of criterion for selecting among alternatives: Pareto improvement, net efficiency improvement, distributional improvement, internal rate of return.

8. Tasks in Benefit-Cost Analysis • Recommendation – Selection of alternative that is most plausible, considering rival ethical and causal hypotheses.

9. Methods and Techniques for Recommendation • Objectives mapping. • Create objectives tree to identify goals, primary objectives, and subobjectives. • Value clarification. • Identify all relevant objects of a policy or program. • Identify all stakeholders (include yourself). • List the value premises that underlie each stakeholder’s commitment to objectives. • Classify value premises into those that are simply expressions of personal taste or desire (value expressions), those that are statements of about the beliefs of particular groups (value statements), and those that are judgments about the universal goodness or badness of the actions or conditions implied by the objective (value judgments). • Further classify value premises into those that provide a basis for explaining objectives and those that provide a ground for justifying objectives.

10. Methods and Techniques for Recommendation • Value critique. • Identify one or more advocative claims (recommendations). • List all stakeholders. • Describe each stakeholder’s argument for and against the recommendation. • Identify each element in the debate: I, C, Q, W, B, R. • Assess the ethical persuasiveness of each argument and determine whether to retain, alter, or reject the recommendation.

11. Methods and Techniques for Recommendation • Cost element structuring. • 1. Primary direct costs • One-time fixed costs. • Research. • Planning. • Development, testing, and evaluation. • Investment costs. • Land. • Building and facilities. • Equipment and vehicles. • Initial training.

12. Methods and Techniques for Recommendation • Cost element structuring. • 1. Primary direct costs • Recurring (operating and maintenance) costs. • Salaries, wages, and fringe benefits. • Maintenance of grounds, vehicles, and equipment. • Recurrent training. • Direct payments to clients. • Payments for extended support services. • Miscellaneous materials, supplies, and services.

13. Methods and Techniques for Recommendation • Cost element structuring. • 2. Secondary (indirect) costs. • Costs to other agencies and third parties. • Environmental degradation. • Disruption of social institutions. • Other.

14. Methods and Techniques for Recommendation • Cost estimation – provides information about the dollar value of items in a cost element structure. • Typically estimates unit costs.

15. Methods and Techniques for Recommendation • Shadow pricing. • Comparable prices – comparable or similar items in the market. • Consumer choice – observing consumer behavior in situations where consumers are forced to choose between a given intangible and money. • Derived demand – Intangibles valued by indirect costs paid by visitors. • Survey analysis – Surveys indicate at what level of costs respondents will be willing to pay for a given service. • Cost of compensation – Intangibles valued by finding prices for actions required to correct problems.

16. Methods and Techniques for Recommendation • Constraint mapping (used with objectives mapping). • Physical constraints. • Legal constraints. • Organizational constraints. • Political constraints. • Distributional constraints. • Budgetary constraints.

17. Methods and Techniques for Recommendation • Cost internalization. • Production-to-production spillovers (products used affect products used by others). • Production-to-consumption spillovers (products affect consumption by others). • Consumption-to-consumption spillovers (consumption affects consumption by others). • Consumption-to-production spillovers (consumption affects production elsewhere).

18. Methods and Techniques for Recommendation • Discounting (selection of an appropriate rate). • Private discount rates. • Social discount rates (usually lower than the private rate). • Government discount rates.

19. Methods and Techniques for Recommendation • Sensitivity analysis. • Alternative assumptions about costs. • Projections of costs. • Alternative discount rates. • A fortiori analysis. • Resolve uncertainty in favor of a weaker alternative to see if the stronger alternative still trumps it.

20. Methods and Techniques for Recommendation • Plausibility analysis. • Invalidity (wrong causal model). • Inefficiency (in estimates). • Ineffectiveness. • Exclusion (missing costs and benefits). • Unresponsiveness (decisions may not be flexible). • Illegality (illegal recommendation). • Unfeasibility (ignores constraints). • Inequity (recommendation is unfair to some group). • Inappropriateness (Unethical to consider recommendation). • Misformulation (wrong definition of the problem).