Economic assignment due in 10 hours!!

TECON 480 – Class 12

May 16, 2019

Part 3 – Undertaking the analysis

• Assignment #2 due May 21

• Instructions available on Canvas

• Assignment #3 due May 27

• Assignment #4 due June 2

• Final report due June 8

• No class on May 30 2

Announcements / Reminders

Last Class

• Discussed the timing of costs and benefits and the concept of

discounting

3

Today’s Class

• Work through an example of calculating NPV using a

spreadsheet

• See an example of a CBA presentation of results

• Discuss/summarize Assignment #1

• Introduce and work on Assignment #2

4

Sensitivity Analysis in Discounting

• Determining the appropriate discounting method and the

value of the social discount rate is often difficult, and this

creates a risk of bias (why?)

• Consequently, sensitivity analysis should usually be

conducted on the discount rate

• We will discuss this concept more generally later in the course

• Useful to plot the NPV of a project for several possible values

of the discount rate 5

Sensitivity Analysis in Discounting

Example:

• Suppose that implementing a carbon tax in WA would cost

$20 billion in 2017 and $10 billion in 2020

• Benefits of $3 billion per year would be received annually

from 2021 until 2050

• Calculate the NPV of the carbon tax using the following values

for the social discount rate:

6 { }1%,2%,...,10%i =

Hint: use Excel to automate the calculations

(see ‘NPV example’ in the “Miscellaneous Files” folder on Canvas)

Undertaking & Presenting the Analysis

• In Part III, we turn to carrying out the analysis

• See ‘Example CBA Report’ in the ‘Miscellaneous Files’ folder in Canvas

• This (far from perfect!) report provides an example of how CBA is carried out in practice

• Also provides some insight into:

• The importance of uncertainty (our next topic)

• How to present (or not present) results to stakeholders

• Do you notice anything good or bad about each slide?

7

Assignment #2

Before beginning the analysis

• Return to Assignment #1 and finalize the following:

1) What alternatives you will be comparing

2) Who has standing in the analysis

3) Which costs and benefit categories you will include in the

analysis

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Step 1: Specify the set of alternatives

• Potential alternatives

• Specify the status quo (or the counterfactual)

• For the purposes of our assignment, we will focus on analyzing

only two alternatives:

Alternative 1: do not build the BRT (the status quo, which will be

considered as the counterfactual and has NPV = 0)

Alternative 2: build the BRT (NPV > 0 or < 0 ?)

9

Assignment #1: Step 1

Step 2: Decide whose benefits and costs count (standing)

• Who the possible decision-makers are and the objective of the

analysis

• For this assignment, we can assume that either Pierce Transit

or the Pierce County voters are the decision-makers.

• The objective of the analysis is to decide whether or not to

build the BRT system, and we can assume that both Pierce

Transit and voters would only want to move forward with

building the BRT if it was worthwhile from society’s

perspective.

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Assignment #1: Step 2

Step 2: Decide whose benefits and costs count (standing)

• Whose benefits and costs should count in the analysis

• For standing, we would have to decide whether only the

effects on Pierce Transit residents should be considered.

• For this assignment, we will assume that the impacts of the

project outlined in Assignment 2 are all related to those with

standing in the project.

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Assignment #1: Step 2

Step 3: Identify the impact categories, catalogue them, and select measurement indicators

• Costs (including units of measurement)

• Benefits (including units of measurement)

• Undetermined (including units of measurement)

• There are many possible impacts of the BRT project, both in terms of costs and benefits.

• Key is to include only effects that are incremental and any changes are caused by the BRT project.

• Also important to properly use economic theory to measure the impacts appropriately (along the lines of our discussions throughout the class).

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Assignment #1: Step 3

Step 3: Identify the impact categories, catalogue them, and select measurement indicators

• Costs (including units of measurement)

• Benefits (including units of measurement)

• Undetermined (including units of measurement)

• For our assignment, we will only be including the impacts that have information provided in Assignment 2.

• Note that this list is not exhaustive and for practical reasons we are limiting the impacts included in the analysis.

• For Assignment 2, you should use only the impacts listed in the Assignment 2 instructions, and not the previous impacts that you outlined in Step 3 of Assignment 1.

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Assignment #1: Step 3

• Issues to remember:

1. Primary vs. secondary markets: direct vs. indirect effects?

2. Are these incremental effects?

3. Are these impacts quantifiable?

4. Are there any impacts that we are not including? If so, they

should be noted in the final report.

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Assignment #1: Step 3

Assignment #2

Step 4: Predict the impacts quantitatively over the life of the

project

Step 5: Monetize (attach dollar values to) all impacts

15

Assignment #2 � Assignment #3

• In Assignment #3, we will take the results of Steps 4-5 and

begin developing a spreadsheet that includes the information

from Assignment #2

• You are encouraged to begin that process in Assignment #2

• I will provide a spreadsheet template for you with the

Assignment #2 answer key and the Assignment #3 instructions

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Assignment #2

With a partner or a small group, spend the rest of the class

discussing and working through as much of Assignment #2 as

you are able to

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