Download Identification of Benefits and Costs


Identification of Benefits and
Costs
 Identify all relevant costs and
benefits,
Costs or benefits can be either
direct or indirect. They are also
tangible or intangible. All
kinds must be identified as
they are relevant.
Beware of double counting of
costs and benefits

Calculation of Benefits and Cost
in Monetary Value
Whenever possible any
relevant cost or benefit be
converted to monetary value
The problem of intangible
costs
and
benefits
are
generally not convertible into
monetary
For private projects, market price is
applicable for any component of
benefits and costs.
 In contrast, for government projects
market price is not applicable to
certain types of goods and inputs.
 For instance, roads, electricity and
drinking water cannot be priced at
market price. Instead, shadow price
will be used in valuing these items

Other factors that make
market price may not
applicable for certain types of
component of benefits and
cost of government project
include: monopoly, tax,
unemployment and


Monopoly
 Price used in evaluation of
government project depends on
impact of usage of input in a project
If a goods used as input in
government project cause output
increase as much as input used in
the project, opportunity cost that the
society faces is the marginal cost of
production
 If
a goods used as input in
government project did not cause
increase output in market as
much as input used in the project,
value of input used government
project is market price. This is
because its use compete with that
by other consumers.
Prevalence of Tax
When the government project
uses goods upon which some tax
has been imposed:
 If production increases, tax must
be excluded from the paid price
 If production does not increase,
market price is used in evaluating
the project

Unemployment
 Use of unemployed labor does not reduce
production of goods in economy.
 If used unemployed labor in government
project, shadow pricing must be used to
determine their wage.
 If used employed labor in government
project, their wage rate will be the same as
the market wage rate. The reason is this.
They were employed in other sectors,
taking them from these sectors will reduce
outputs of these sectors.

Determination of interest rate is of crucial for
government projects. Different rate will produce
different result.
 For illustration, observe the following case of two
projects (Project-1 and Project-2)

Interest rate
0
5
10
Project -1’s NPV
90 = 90
(1+0)º
90 = 90
(1+0.05)º
90 = 90
(1+0.1)º
Project-2’s NPV
100
= 100
(1+0)²
100
= 90.9
(1+0.05)²
100
= 82.6
(1+0.1)²
From
the table, it is clear that
high interest rate makes NPV of
the project which produce
benefit for a longer period of
time become smaller
Level of interest rate is selected
for the project depends on
potential risk faced by the
project.
Normally,
for government projects
social discount rate is used. This
rate has reflected inflation and
tax.
According to Arrow, government
implements a variety of projects
so
that
overall
government
projects are risk-free.
General discount rate
Risk
10 persen
2 persen
Income
15 persen
Saving (increment after
the project)
Inflation rate
-4 persen
Social Discount Rate
12 persen
-11 persen
Advantage:
 Its application in projects ensure that
use of resources in projects are
efficient
 Disadvantage
 B-C analysis requires quantitative
data. In fact, not all components of
benefit and cost can be measured
quantitatively . This can result in a
wrong conclusion

Mangkoesoebroto, Guritno. 1999.”Ekonomi
Publik”. Yogjakarta: BPFE. Chapter 7
Stiglitz, Joseph E. 2000. “Economics of the
Public Sector”. New York: W.W. Norton and
Company. Chapter 11