ADVANCED RESEARCH METHODS

APPLIED COST-BENEFIT ANALYSIS

Spring 1999

Charles S. Colgan

608 Law
780-4008
Fax 780-4417

Overview:

This course provides an opportunity to learn how to conduct cost-benefit analysis. Students will work individually and in teams to analyze the quantitative and qualitative issues involved in measuring and forecasting costs and benefits and in preparing analysis for decision makers. The emphasis will be on learning the practical issues involved in conducting cost benefit analysis. It is assumed that students will be familiar with the underlying economic theory, either from an economics course or from the text.

PREREQUISITE: Familiarity with spreadsheet use. The course will use Microsoft Excel for the analytic exercises. Students may use another spreadsheet or statistics package, but instruction will focus on Excel.

Assignments

Four written assignments are required as outlined in the syllabus. These must be available at the beginning of the class when they are due for review by other members of the class. Each paper will be graded and will count 20% of the final grade. Some projects will be done in teams, some individually. 20% of the grade will be for class participation.

Learning Strategies

This course emphasizes learning by doing rather than presentations. While there will be some presentation each week in preparation for the next class, the principal focus will be on the students' projects. To get the most out of the course, you need to adopt the following learning strategies:

Practice, practice, practice. Learning quantitative analysis is rarely immediately intuitive. The only way to acquire familiarity and some degree of facility with the approaches to analysis discussed in the course is to keep practicing. Making mistakes is less important than continuing to practice the techniques.

Peer learning Through team projects and review of other class members products, much of the learning in the course will be through your peers. The benefits you get from this experience will be directly proportional to your contributions to team projects and to careful and serious reviews and critiques of other's work.

Text to text. While there will be some classroom instruction in the quantitative techniques, students will need to rely on the text for the course for a good deal of the theory behind the techniques and for the details of many of the calculations. In actual practice, analysts will often have to rely on their own reading and learning skills to brush up on old skills or learn new ones.

Texts

Boardman, et. al. Cost Benefit Analysis: Concepts and Practice
Kennedy School of Government:

Bridge over the Tempisque River (C18-05-1292.0)
High Mountain Sheep Dam (Abridged) (C15-79-049.3

April 7 Introduction to Cost Benefit Analysis

Readings for this week: Boardman, et. al. Chapters 1 and 2
Assignment due next week: Identifying costs and benefits, Bridge over the Tempisque River

April 14 Measuring non market costs and benefits

Readings for this week: Boardman, et. al., Chapters 4 and 5
Assignment for next week: High Mountain Sheep Dam

April 21 Forecasting and cost-benefit analysis

Readings for this week: Boardman, et. al., Chapters 7, 8, 11
Assignment for next week: Contingent Valuation Questions

April 28 Adjusting for Risk and Uncertainty

Readings for this week: Boardman et. al., Chapters 12, 13, and 15
Assignment for next week: Department of Corrections Investment Plan.

May 5 The Prisons Cost Benefit Analysis

Assignment 1 (Individual Projects)

Read the KSG case "Bridge over the Tempisque River". Prepare a brief memo identifying the key elements of the cost-benefit analysis of the bridge (in comparison with the ferry system). Infer from the text description in the case what the equations are that would be used to calculate the benefits and costs (ignore any discounting). Which of the variables used in the analysis do you think are most likely to be critical values in determining the outcome? (Put another way, which variables do you think are most important to do sensitivity analysis on?) Which variables rely primarily on analyst's assumptions and which rely primarily on actual data? What data would you suggest be used to redo the cost-benefit analysis to take into account the environmental and tourist industry's concerns. (Bonus points: Can you spot the flaw in the in the analysis of the economic benefits of tourism?)

Assignment 2 (Team Projects)

Prepare a briefing paper on the economic feasibility of the proposed High Mountain Sheep Dam, using a cost benefit analysis from the data in the case. What are the consequences for the feasibility of the project of Krutilla's criticisms?

Assignment CB 3 (Team Projects)

Read Boardman, pp. 324-331 and Chapter 11. Prepare a questionnaire with questions designed to elicit information that would be useful in a contingent valuation and travel cost study on the value of beach recreation in Maine.

Assignment 4 (Individual Projects)

Using the data from the handout on the Maine Department of Corrections proposed prison investments (see below), prepare a cost benefit analysis of the proposed investments in both the adult and juvenile systems. Write a brief memo on your conclusions and the principal reasons therefor.

REFORMING THE MAINE CORRECTIONS SYSTEM

1. Questions to be answered:

Will closing the Maine State Prison and the correctional facilities in Bucks Harbor, Hallowell, and Bangor and replacing them with two prisons for adults in Warren and Windham and expanding the array of services to adult prisoners be justified on economic grounds?

Will repairing and rehabilitating the Maine Youth Center in South Portland, creating a Northern Maine Youth Center out of the existing facility in Charleston, and expanding the array and improving the quality of services to juveniles make economic sense?

Will the combined juvenile and adult system investments be economically justified?

Assuming that the work of the architects and criminal justice planners are accurate, upon what economic factors do your conclusions depend?

2. Hints and Other Useful Information:

• Construction period = 3 years, beginning 1999
• Operating period = 20 years
• State Borrowing Rate = 5.5%
• Operating Costs of the Current Adult System are given in Table 1
• Operating Costs of the Current Juvenile System are given in Table 3
• Capital and Operating Costs of the Proposed Adult System are given in Table 6
• Capital and Operating Costs of the Proposed Juvenile System are given in Table 7
• The capital costs includes the costs of moving prisoners from existing facilities to the new or rehabilitated facilities.
• Assume that without the changes in the proposed system the following costs will be incurred:

as much as $2.95 million per year in repair, maintenance and rehabilitation costs for all existing facilities;
$40 million in capital costs at Warren and Windham to handle an expected increase in the prison population.

If cost savings do not cover the capital costs, external benefits may have to be used. For a corrections system, this would include affecting the economic costs of crime. Assume that you have data showing that the costs of crime in 1995 in Maine, based on the number of crimes committed and a national study of the economic costs of crime are as follows:

Estimated Rates and Costs of Crime in Maine: 1995

Feel free to use population projections from government or other sources if you need forecasts.

Do everything in real dollars; ignore inflation.

To answer the questions posed, you will need to do more than one analysis. Be careful about doing too many scenarios and how you organize your final presentation.