We want to evaluate a policy change.

For example, in the beginning the US might have no

tariff on steel. Now we want to evaluate whether a

tariff on steel is good for the US or not.
To evaluate the policy change, we need to conduct a
cost benefit analysis of the change.

6 Potential Pitfalls
Things to pay attention to when doing a cost benefit

analysis of a change:
1. It is an analysis of a change. So we will compare
before and after.
2. We need to account for all quantities. For example,
if in the beginning the US buys 60 pounds of steel,
some of which are produced domestically while the
rest is imported. In a cost benefit analysis of a tariff on
steel, it would be wrong to focus on just the increase in
US production of steel. We need to account for all 60
pounds instead of just a portion of it.

 3. For each party affected, we need to account for both

gains and losses. For example, when producers make and

sell more, they will have a gain from more revenue.
However, dont forget that to produce more, there is
additional costs involved.
4. We need to account for all parties involved. For example,
we should not look at the effect on producers and leave out
consumers.
5. We want to analyze the total effect of a policy change on
the whole country. Therefore we will sum up the effects on
all parties. This is called the net effect on the US.

 6. Do not assume that the policy change is the only

change. When there is a policy change, peoples

behavior will also change. For example, if US users
buys 60 pounds of steel before a tariff, do not assume
that they will continue to buy the same amount after a
tariff.

 To make sure that we will take care of all six potential

pitfalls mentioned above, we will set up a series of

tables to do the cost benefit analysis systematically.
I will call this a cost benefit analysis schema.

1. It is an analysis of a change. So we will compare

before and after.

In each table, have a column

for before and a column for
after.

2. We need to account for all quantities. For

example, if in the beginning the US buys 60
pounds of steel, some of which are produced
domestically while the rest is imported. In a cost
benefit analysis of a tariff on steel, it would be
wrong to focus on just the increase in US
production of steel. We need to account for all 60
pounds instead of just a portion of it.

Have a set of tables to

account for all quantities.

3. For each party affected, we need to account for

both gains and losses. For example, when
producers make and sell more, they will have a gain
from more revenue. However, dont forget that to
produce more, there is additional costs involved.

In each table, have a column

for gain and a column for
loss.

4. We need to account for all parties involved. For

example, we should not look at the effect on
producers and leave out consumers.

In each table, have a separate

row for each party involved.

5. We want to analysis the total effect of a policy

Have a row for the net effect.
change on the whole country. Therefore we will sum
up the effects on all parties. This is called the net
effect on the US.
6. Do not assume that the policy change is the only
change. When there is a policy change, peoples
behavior will also change. For example, if US users
buys 60 pounds of steel before a tariff, do not
assume that they will continue to buy the same
amount after a tariff.

This will be reflected in the

before and after columns.