Key Concepts: Measuring costs

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22 févr. 2014 (il y a 3 années et 1 mois)

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Key Concepts: Measuring costs
and benefits

Cost
-
Benefit Analysis Workshop

23
-
25 April 2012

Marita Manley, GIZ


Contents

1.
Objectives

2.
Illustrative example

3.
Types of costs and benefits

a)
Costs

b)
Benefits

4.
Marginal
vs

Non
-
Marginal Change

5.
Whether to measure

6.
Recap






1. Objectives

Understand through examples:

1.
Whose perspective?

2.
Types of costs and benefits included in CBA

3.
Why it is important to know whether
changes are marginal or non
-
marginal

4.
When to measure

2. Illustrative Example


Soil erosion prevention program


Trains and equips farmers who occupy sloping lands,
to implement a soil erosion prevention technique
which is
planting tree crops and grasses in lines on
sloping soils to prevent soil erosion


Objective of the project is to


sustain farmer yield,


possibly increase farmer revenue,


decrease river dredging costs


increase ecosystem health of rivers and coral

Soil Erosion Prevention Program


Total Costs = Explicit Costs + Implicit Costs


Total Benefits = Market Benefits + Non
-
Market
Benefits



3. Types of Costs and Benefits

A) COSTS

Explicit Costs



Costs of buying materials,
labour
, and machines to build project
(accounting costs)




Purchased items needed for project



Soil erosion prevention example



Labour

costs of putting together training program and costs of
trainers/extension workers



Travel expenses



Material costs (planting materials/inputs e.g.
fertilisers
)



Purchased or rented capital (any machines/tools)

Implicit Costs



Opportunity costs


Value of farmers’ time


training


implementing e.g. soil erosion prevention practices


Revenue otherwise generated from land used


e.g. to plant grass and tree crops


Rental value of tools/machines already owned



Non
-
market costs


Lost goods and services not sold by market

Measuring Costs


If we assume our project does not change market prices, we can use
market prices to value inputs




Examples of data we would need for our soil erosion prevention program:


Wage rates to value
labour



extension workers, farmer time in
training and carrying out soil erosion prevention practices


Price of inputs e.g. planting materials,
fertiliser


Rental rate to value capital equipment (tools/machines)


Also, data on quantities needed:


Estimates for
labour

time spent by extension workers and farmers on
training, farmer
labour

time spent on soil erosion prevention practices


Quantities of inputs

B) BENEFITS

Market Benefits


Benefits that directly accrue to society (consumers and
producers) of a good/service purchased in markets



Soil erosion prevention example:


More sustained (lower rate of decrease in) crop yield due to
less land degradation


Increased revenue from crops/trees grown that stop soil
erosion


Less time and money spent on dredging river


Non
-
Market Benefits



Non
-
market benefits (and costs) come

from
goods/services that aren’t purchased within a
market


Soil erosion prevention example:


Preservation of ecosystem services provided by
rivers and coral reefs due to less soil
sedimentation and chemical leaching


Measuring Market Benefits


If we assume our project does not change market
prices, we can use market prices to value inputs


Soil erosion prevention example:


Price

of crops whose yield is sustained due to less soil
erosion


Price of crops grown (e.g. tree fruits) to stop soil erosion


Other data needed:


Lower cost of dredging river


Quantities of crops grown to stop soil erosion


Increase in quantity of crops grown after soil erosion
prevention program compared to without

www.sprep.org/climate_change/pacc

Measuring Non
-
Market Benefits


Since these goods/services are not traded in a market, if they are large we
can to use other techniques to infer the values.



Can use values measured elsewhere


Examples:



Willingness to pay



Travel Cost Models



Averting Behavior Models



Stated Preference Techniques

4. Marginal
vs

Non
-
Marginal Changes


A change is marginal if it does not change price




Use price to value quantity



For example, $25/20kg bag of cabbage




The value of a change is price times the change in quantity


Non
-
Marginal Market Change


IMPORTANT FOR LARGE SCALE PROJECTS: A
change is non
-
marginal if it is big enough to
change market prices. If we assume a large
project will not change prices we are at risk
of hugely underestimating or overestimating
the net benefits of the project.



E.g. if a project has the effect of doubling cabbage production
in Fiji, this may flood the
Sigatoka
, Suva and
Nadi

markets
with cabbage which is likely to decrease the price, so we can
no longer assume the price will continue to be 25 dollars per
bag of cabbage nor a doubling of revenue for farmers.


We need a demand function for the market good


we need
to know what will happen to price if we double cabbage
production, we cannot assume the price will stay at 25
dollars/bag of cabbage.


Thus we need to estimate a demand function


in English,
how would the price respond if we increase production

A demand
f
unction: as supply
increases, price decreases

5. When to measure


Larger projects, important projects, pilot projects and projects with attentive
decision
-
makers should have priority in CBA efforts due to higher stakes



The cost of doing the analysis should be small relative to the cost of the
project itself



Some costs and benefits aren’t worth capturing because they are either too
small or too abstract (e.g. existence value of an obscure and tiny
mollusc

in the
coral reef that may survive due to less soil erosion)



Some important aspects of the analysis may be hard or expensive to measure


For example, ecosystem services values of river and coral reef, amount of
soil that is prevented from eroding


Where possible, borrow values from other studies or projects (e.g.
universal soil loss equation


Thinking laterally


There is more than one way to skin a cat.


Because of data and resource limitations, we are often
required to think of alternate ways to make
measurements


E.g. the value of a new bridge


travel time (valued at average local wage) saved by
working population?


value of new trade/business that it stimulates?


lower cost of vehicle repair due to not having to drive
across a rocky river?


lower ongoing repair costs compared to rickety old bridge?


what was the main rationale for a new bridge?

When measuring is impossible?


Where it is not feasible to quantify some costs or benefits that may
be important in monetary terms or this cannot be done with any
precision, applying the CBA framework is still important and useful



ensures that all relevant costs and benefits are identified and
properly considered as part of project appraisal/evaluation



clarifies particular areas of uncertainty and/or disagreement in
project appraisal/evaluation.


6. Recap

Objectives were to understand through
examples:

1.
Whose perspective?

2.
Types of costs and benefits included in CBA

3.
Why it is important to know whether
changes are marginal or non
-
marginal

4.
When to measure


www.sprep.org/climate_change/pacc

Key messages


Costs to be included in analysis can be categorised as:


Explicit


Implicit


Non
-
market is a type of implicit cost


Benefits to be included in analysis can be categorised as:


Market


Non
-
market


If a project is large relative to a domestic market, may be important to
take into account non
-
marginal changes


Detail and accuracy of CBA should be proportional to size and importance
of project. Large, important or pilot projects should usually have priority
in CBA efforts. Also helps if the CBA will be paid attention by decision
-
makers.


T
ANGIO TUMAS/TENKYU TRU/THANK YOU/VINAKA VAKALEVU/SULANG/KO RABWA
/TUBWA KOR/MALO
'AUPITO/FA'AFETAI TELE LAVA/MERCI BEAUCOUP/KIA MANUIA/KIAORA KOE
/KOMOL TATA/FAKAUE
LAHI/SI YU'US MA'ÅSE‘/TEKE RAOI/KALANGAN/FAKAFETAI


Thank you


Jonathan Bower

Resource Economist, Land Resources Division

Secretariat of the Pacific Community

jonathanb@spc.int

+679 337 0733


ext 35425



lrdeconomics.wordpress.com

Also available from ‘information and networks’ tab at www.spc.int/lrd