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Economic Analysis

Economic Analysis. March 2004 Maine. Economic Principles. Types of Economic Analysis. With/Without Benefit Cost Analysis Cost Effective Analysis Partial Budget Marginal Analysis Enterprise Budgets Net Worth Statement. Future With and Future Without.

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Economic Analysis

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  1. Economic Analysis March 2004 Maine Economic Principles

  2. Types of Economic Analysis • With/Without • Benefit Cost Analysis • Cost Effective Analysis • Partial Budget • Marginal Analysis • Enterprise Budgets • Net Worth Statement

  3. Future With and Future Without • Compare future with conservation to the future without it • Benefits of conservation determined by the difference between with and with out • Always have the effects of “do nothing” compared to effects with conservation installed

  4. Sediment Damage

  5. Benefit Cost Analysis • Total benefits compared to total costs – usually expressed as a ratio (such as $1.10 to $1) • >$1/$1, GOOD! • <$1/$1, NOT AS GOOD • Used mostly for area-wide projects and national programs • Required by law for certain programs

  6. Benefit Cost Analyses of Conservation Programs

  7. Economics of CRP National benefits/costs +Increased net farm income $2.1 to $6.3 billion +Value of future timber $3.3 billion +Preservation of soil productivity $0.6 to $1.7 billion +Improved surface water quality $1.3 to $4.2 billion +Reduced windblown dust $.3 to $.9 billion +Enhanced small game hunting $1.9 to $3.1 billion $9.5 to $19.5 billion -Higher food cost to consumers $2.9 to $7.8 billion -Veg. Cover establishment $2.4 billion -USDA tech. Asst. $.1 billion $5.4 to $10.3 billion Net Value = $4.1 to $9.2 billion Source: Osborn and Konyar (1990)

  8. Kenduskeag Watershed Project Economic Benefits Adapted from Watershed Plan – EA, Kenduskeag Stream Watershed, November, 1988

  9. Monetary vs. Non-Monetary Benefits • Market goods lumber, grain, cars, pencils, etc. • Non-market goods clean water, scenic farmland, wetland functions/values, wildlife

  10. Non-monetary Benefits How to put a $ value on goods/services not traded in the market? • Contingent valuation • Travel cost method • Hedonic Studies ?

  11. Hedonic Studies Property Price ($) Environmental Quality Pollution Level

  12. Maine Lakes • willingness of users to pay for water quality: $2 to $6 million per year • >200,000 Mainers spend ~$100 million per year in recreation associated with lakes • 1 meter reduction in summertime water clarity: 3 - 5% reduction in lakefront property value Source: 2000 National Water Quality Inventory Report, EPA, p. 64. www.epa.gov/305b

  13. Cost Effectiveness • A tool to measure the effectiveness of a practice or plan relative to its cost • Used to obtain a set objective at the least cost, OR • To obtain the best results at a set cost

  14. Cost Effectiveness • Best Buy • What is the better deal when comparing the amount of physical effects and the cost to get it • 1 fish per 50 mile trip or 3 fish per 100 mile trip???

  15. Two hypothetical questions that cost-effectiveness would try to answer: • If we have $1 million, how can we get the most conservation possible? Constant cost • If we want to reduce pollution by 40 percent, what is the cheapest way to do that? Constant effects

  16. Cost-effectiveness (cont.) • Costs are associated with a particular unit reduction or increase (the effect) • Lbs of N prevented from reaching streams • Tons of soil saved • Acres of habitat created • Number of life-years saved • Ducks made happy (?)

  17. C-E Example 1: Constant Effects

  18. C-E Example 2: Constant Cost

  19. C-E Example 3: Costs & Effects Vary

  20. Cost-effectiveness in Ranking Systems

  21. Partial Budgeting • A planning and decision-making framework used to compare the costs and benefits of alternatives faced by a farm business.

  22. Partial Budgeting • Systematically displays the positive and negative effects of a change • Only those factors that change are considered • Useful tool for analyzing almost any type of change

  23. Situations where a farm might use partial budgets • Substituting one crop for another • Adding a few head to a livestock enterprise • Taking advantage of an early payment discount on a fertilizer bill • Adopting a new production practice • Participating in a government program

  24. Partial Budget Elements Added Income • Reduced Costs ______________ Total Positive Effects Added Costs • Reduced Income _______________ Total Negative Effects

  25. Partial Budget • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ • ____________________________ Total + ________ Total - ________

  26. Marginal Analysis • Think at the margin - we look at the last increment • Trying to find the most economical input level • Marginal Benefit equal to or greater than Marginal Cost • Common sense to have the income or value of the product greater than the cost

  27. WHERE DO WE WANT TO BE? WHERE MVP >=MC

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