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
3. Types of Costs and Benefits
• Total Costs = Explicit Costs + Implicit Costs
• Total Benefits = Market Benefits + Non-Market
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
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
www.sprep.org/climate_change/pacc
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 function: 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
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 decisionmakers.
www.sprep.org/climate_change/pacc
Thank you
TANGIO 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
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