cost benefit analysis

• What does CBA stand for in the context of this study material?

  Cost Benefit Analysis
• Cost-benefit analysis is a decision-making tool that accounts for the social costs and social benefits of a project over time to establish a Net Present Value.
• Social costs in CBA include both private and external costs.
• What are social benefits in CBA composed of?

  Private and external benefits
• The goal of cost-benefit analysis is to establish a Net Present Value.
• What does a positive Net Present Value (NPV) in a CBA indicate?

  More benefits than costs
• If the Net Present Value (NPV) of a project is negative, it is recommended to proceed with caution.
• Current projects that have undergone CBA include Crossrail, HS2, and the Olympic Games.
• What is the main idea of CBA in economics?

  Efficient allocation of resources
• Steps in conducting a cost-benefit analysis

  1️⃣ Identify private and external costs and benefits

  2️⃣ Make value judgments

  3️⃣ Attach monetary values

  4️⃣ Apply weights and probabilities

  5️⃣ Use a discount rate

  6️⃣ Calculate Net Present Value

  7️⃣ Perform sensitivity analysis
• Value judgments in CBA involve subjective opinions about which costs and benefits to include.
• Monetary values are attached to costs and benefits in CBA using methods like shadow pricing or compensation costs.
• Why are weights applied to costs and benefits in CBA?

  To reflect severity
• The probability of an event occurring is considered when applying weights in CBA.
• A discount rate is used in CBA to account for the time preference of money.
• What is the primary purpose of discounting future costs and benefits in CBA?

  To determine their present value
• The discount rate in CBA is often based on the yield on government bonds.
• What does sensitivity analysis in CBA assess?

  Changes in assumptions
• A sensitivity analysis in CBA helps determine how the Net Present Value changes with different assumptions.
• What is one major issue with identifying all relevant costs and benefits in CBA?

  Potential omissions
• Attaching monetary values to external costs and benefits in CBA is always straightforward.

  False
• Why is the choice of discount rate significant in CBA?

  It affects the final NPV
• Bias in CBA can occur if the analysis is skewed to favor specific outcomes.
• Environmental groups may prioritize costs over benefits when conducting a CBA for a new runway.
• What is a major opportunity cost associated with conducting a CBA?

  Time and resources
• The subjectivity of weights and probabilities in CBA can affect the final Net Present Value.