Lecture 8 Economic Evaluation and Performance Measurement

Gang He

May 4, 2024

Recap lecture 7

• Data analysis
• Qualitative methods
• Quantitative methods
• Visualization
• Story telling
• Case: NYC G&T Program

Today’s agenda

• CBA: Cost-benefit analysis
• Challenges
• Beyond costs
• Story: Robert Bullard and Environmental Justice
• Case: CBA of EPA Clean Air Act

Cost-benefit analysis

Benefits > Costs = Good Program?

Ten steps

1. Set the framework for the analysis.
2. Decide whose costs and benefits should be recognized.
3. Identify and categorize costs and benefits.
4. Project costs and benefits over the life of the program, if applicable.
5. Monetize (place a dollar value on) costs.
6. Quantify benefits in terms of units of effectiveness (for CEA) or monetize benefits (for CBA).
7. Discount costs and benefits to obtain present values.
8. Compute a cost-effectiveness ratio (for CEA) or net present value (for CBA).
9. Perform sensitivity analysis.
10. Make a recommendation where appropriate.

Program costs

• Costs to program participants
• Cost to society
• Investment
• Recurring costs

Program benefits

• Benefits to program participants
• Benefits to society

Justification

• Benefit cost ratio
• Simple payback
• Payback time
• Rate of return

Discounting

The challenge

Value of the invaluable

Price the priceless

Monitization

• Budget and accounting
• Cost of capital
• Sunk costs
• Indirect costs (overhead)

Willingness to pay

“The maximum price a customer is willing to pay for a product or service.”

• Income
• Geography
• Weather
• Age
• Gender
• Brand loyalty
• Service levels

• Advertising
• Competing products
• Expectations
• Legality
• Packaging
• Environmental or social impact
• Necessity

Value of statistical life

• FEMA: 7.5 million, 2020
• DOT: 12.5 million, 2022

Other FEMA numbers:

• Value of lost time (per hour) (used in the Roads/Bridges detour cost): $34.72
• Value of electrical service (per person per day): $174
• Value of wastewater service (per person per day): $58
• Value of potable water service (per person per day): $114

Value of environment/ecosystem service

• Food
• Raw material
• Clean air/water
• Protection from natural hazards
• Spiritual, cultural, and recreational benefits

$33 trillion, double global GNP

How about

• Happiness
• Justice
• Higher hierarchy needs: self-realization

Sensitivity analysis

• Discount rates (interest rates, inflation rates)
• SVL assumptions
• Costs

Limitations

• CEA/CBA may not be the goal
• Bias on costs and benefits
• Non-market value
• Uncertainties

Beyond CBA

• Outcomes
• Outputs
• Efficiency
• Service quality
• Customer satisfaction
• Quality of life
• Social justice

Story

Robert Bullard and Environmental Justice

References

Bullard, Robert D. 1983. “Solid Waste Sites and the Black Houston Community*.” Sociological Inquiry 53 (2-3): 273–88. https://doi.org/10.1111/j.1475-682X.1983.tb00037.x.

Costanza, Robert, Ralph d’Arge, Rudolf de Groot, Stephen Farber, Monica Grasso, Bruce Hannon, Karin Limburg, et al. 1997. “The Value of the World’s Ecosystem Services and Natural Capital.” Nature 387 (6630): 253–60. https://doi.org/10.1038/387253a0.

Newcomer, Kathryn E., Harry P. Hatry, and Joseph S. Wholey. 2015. Handbook of Practical Program Evaluation. 4th edition. San Francisco: Jossey-Bass.