Syllabus

ECEM801403

Cost Benefit Analysis

Magister Perencanaan Ekonomi dan Kebijakan Pembangunan

Faculty of Economics and Business
University of Indonesia
Syllabus ECEM801403
Cost Benefit Analysis
Instructor Widyono Soetjipto (widyono.soetjipto@ui.ac.id)
Credit value 3 units
Day/hour Friday, 19.00-21.30
Subject type Study Program Elective
Pre-requisite Microeconomics for Policy, and some quantitative analysis would be advantage
Course The goals of this course include learning the fundamentals of cost-benefit
description analysis; using CBA to evaluate policy; and developing an understanding of
CBA’s strengths and limitations. CBA is ubiquitous in modern policy- making
arenas and draws its foundations from many related social sciences.

The course will concentrate on: 1) concepts – to allow you understand and
contextualize CBA, and 2) skills and tools – to help you produce CBA.
Syllabus ECEM801403
Cost Benefit Analysis
Readings Cost-Benefit Analysis: Concepts & Practice, 4th edition, by Anthony Boardman,
David Greenberg, Aidan Vining, & David Weimer (Pearson, 2014).

Additional readings/references will be announced later

Grading It is still under discussion, but there is possibility that
Quizzes : 10%
Timely submission of paper progress : 20%
Midterm Exam (concepts and draft paper) : 35%
Final Exam (submission of final paper) : 35%
Course plan It is still under discussion
Attendance Following study program regulation
Academic You are expected to abide by the University’s expectations regarding academic
integrity integrity, including how to avoid plagiarism
Introduction: CBA
• When individual makes a decision, he/she will cataloguing the impacts, i.e benefit
(pros) and cost (cons), valuing in dollars (assigning weight), and determine the net
benefit of the action relatives to the status quo.
• Contrary to individual/private decision, in CBA, we try to consider all of the costs
and benefits to society as a whole, that is the social costs and the social benefits
à CBA as social cost benefit analysis (vs. financial CBA)
• CBA is a policy assessment method that quantifies in monetary terms the value of
all consequences of a policy to all members of society. Throughout the course we
use the terms policy and project interchangeably.
• The aggregate value of a policy is measured by its net social benefits,
𝑁𝐵 = 𝐵 − 𝐶
Review on Microeconomics: Market Failure
• Partial equilibrium wise, we know that competitive market will produce
allocative efficiency (maximum social welfare)
• When the market does not function properly, it will create market failures, due
to:
• Monopoly power
• Asymetric information
• Externality
• Public goods

• Socially unsatisfactory conditions (market failures) provides a conceptual

framework for diagnosing public policy problems.
Review on Microeconomics: Market Failure
• Therefore we need policy solutions (generic policies) which usually consist of:
• Freeing, facilitating and simulating markets
• Using taxes and subsidies to alter incentives
• Establishing rules/regulation
• Supplying goods through non market mechanism (physical and non-physical projects)
• Providing insurance and cushion (economic protection)
• However, the government should be wise in correcting the market
(equity/distributional issues), i.e. rice price policy, import substitution policy,
crowding out, etc.
• Since general equilibrium wise, an allocation of goods is Pareto efficient if no
alternative allocation can make at least one person better off with- out making
anyone else worse off.
Government Limitations
• Government has power, but not knowledge
• and sometimes not necessarily that much power
• Government and government agencies are different
• Spender (consider costs as benefits)
• Guardian (consider revenue and spending flow only)
• ‘Analyst’ (considered to be neutral)
• Organization, communication, and work flow make a huge difference
(learning organization)
• Government does not understand business or competition or everyday
concerns of ordinary people
• Asymmetric Information
• Officials are self-interested actors (political economic motives)
Introduction: CBA
• Policy problems rarely have a perfect solutions, but some policies are better than others,
so we need to understand the problem and searching for candidate policies (i.e. more
than one policy alternatives) using CBA
• The broad purpose of CBA is then to help social decision making and to make it more
rational. More specifically, the objective is to have more efficient allocation of society’s
resources.
• Given simple formula 𝑁𝐵 = 𝐵 − 𝐶, there are critiques to CBA, namely
benefit tinggi tapi untuk
• Social critiques (does not fairly consider distributional effect/ethical issues) orang kaya
• Participants in the public policy making process may disagree about such practical issues as what
impacts will actually occur over time, how to monetize (attach a dollar value to them), and how to
make trade-offs between the present and the future (design weakness)
• The treatment of intangibles
• Obscurity tidak jelas, mengaburkan, si peneliti sudah punay kecenderungan sendiri,
sehingga tidak memperhatikan perhitunagn CBA,
Why use CBA
• A policy/project is a deliberate decision to commit resources à should ensure
allocative efficiency karena resource terbatas, maka harus allocative effisien

• CBA facilitates meaningful comparisons membandingka proyek 1 dengan priyek lainnya

(alternatif)
• CBA is conducive to good programme manager
• CBA and distributional impact
• CBA encourages clear thinking about the true ‘value added’
• CBA as integral to an evaluation strategy impact:

• CBA can help to meet legislative requirement

 Introduction to Cost-Benefit Analysis

TABLE 1 Value of Different Classes of CBA

Type of CBA
Class of Analysis
Ex Ante/Ex
Post or Ex Ante/
In Medias Res
Value Ex Ante In Medias Res Ex Post Comparison

Resource Yes—helps If low sunk Too late—the Same as in

allocation to select best costs, can still project is over. medias res
decision for project or make shift resources. or ex post
this project. “go” versus If high sunk analysis.
“no-go” costs, usually
decisions, if recommends
accurate. continuation.
Learning about Poor estimate— Better—reduced Excellent— Same as in
actual value of high uncertainty uncertainty. although some medias res
specific project. about future errors may or ex post
benefits and remain. May analysis.
costs. have to wait
long for study.
Contributing Unlikely to Good—contribution Very useful— Same as in
to learning add much. increases as although may medias res
about actual performed later. be some errors or ex post
value of similar Need to adjust and need to analysis.
projects. for uniqueness. adjust for
uniqueness. May
have to wait
long for project
completion.
Learning No No No Yes, provides
about omission, information
forecasting, about these
measurement errors and
and evaluation about the
errors in CBA. accuracy of
CBA for
similar projects.
Source: Anthony E. Boardman, Wendy L. Mallery, and Aidan R. Vining, “Learning from Ex Ante/Ex Post
Cost-Benefit Comparisons: The Coquihalla Highway Example,” Socio-Economic Planning Sciences, 28(2),
1994, 69–84, Table 1, p. 71. Reprinted with kind permission from Elsevier Science Ltd., The Boulevard,
Langford Lane, Kidlington OX5 1GB, UK.

it is obviously too late to reverse resource allocation decisions with respect to that par-
ticular project.

Learning about the Net Social Benefits of a Specific Project

In the early stages of a project there is considerable uncertainty about its actual impacts
and, consequently, about the true net social benefits. As time goes by, more is known
about the impacts, and CBA studies conducted later can estimate the net benefits of the
The MajorIntroduction
Steps toinCost-Benefit
CBA Analysis
TABLE 2 The Major Steps in CBA
1. Specify the set of alternative projects.
2. Decide whose benefits and costs count (standing).
3. Identify the impact categories, catalogue them, and select measurement indicators.
4. Predict the impacts quantitatively over the life of the project.
5. Monetize (attach dollar values to) all impacts.
6. Discount benefits and costs to obtain present values.
7. Compute the net present value of each alternative.
8. Perform sensitivity analysis.
9. Make a recommendation.

analyst’s CBA is presented in Table 3.5 How did the analyst get these results? What
were the difficulties? We will go through each of the nine steps.

1. Specify the set of alternative projects. Step 1 requires the analyst to specify the set
of alternative projects. In this example, the provincial government required the analyst to