By D. W. Pearce (auth.)

ISBN-10: 0333352815

ISBN-13: 9780333352816

ISBN-10: 1349171964

ISBN-13: 9781349171965

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Sample text

Debate still occurs on which to use. , 1982). For the record, CV is the measure most widely recommended in the theoretical literature (Mishan, 1975). 1), we now have an approach to its measurement via the concept of consumer surplus (CV), albeit with some cautionary notes about how to proceed. 1) suggests that we now need to subtract from WTPi the amount WTPi which is a measure of the surplus forgone on the sacrificed project {j). In fact, CBA does not proceed in this way. What it does is to substitute for WTPi the costs of implementing project i.

Adjusting the decision rule The decision rule obtained in Chapter 3 was that benefits should exceed costs before we consider a project to be a candidate for acceptance. This chapter has shown that we need to introduce time and discounting. e. 9) could be rewritten using s instead of r. The expression involving benefits is the present value of benefits, PV (B), and PV (C) is the present value of costs. 1 0) where NPV reads 'net present value'. 9) requires that NPV> 0. 9) which are common in the CBA literature.

Let the initial situation be that Q1 of i is bought at price P 1 . The project in question changes the output and price to Q 2 and P2 respectively. Chapter 2 indicated that the WTP for Q1 is made up of the amount actually paid ( OQ1 XP1) plus the excess of willingness to pay over actual price (PI XZ). Clearly, then, the new total WTP for Q2 is OQ2 YP2 plus P2 YZ. The WTP for the change in Q (= Q2 - Q1) is thus Q1 Q2 YX. We require an expression for this area. We can see that Q1 Q2 YX is made up of an extra amount actually paid, Q1 Q2 YW, and the triangle WYX.

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Cost-Benefit Analysis by D. W. Pearce (auth.)


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