Exercises: Cost-benefit analysis

Explain what cost-benefit analysis is and what public authorities use it for before approving a project. Give an example of a project in your local municipality to which it could be applied.

A municipality is considering building a bike lane. Classify these items as costs or benefits of the project: the construction of the bike lane, reduced congestion, annual maintenance, health improvements for cyclists, and lost parking spaces.

A project has estimated benefits of $\$1\,800\,000$ and costs of $\$1\,200\,000$.

1. a) Calculate the net benefit and decide whether the project is advisable according to the cost-benefit criterion.
2. b) What warning would you give before relying entirely on this calculation? Mention at least one.

The school is considering installing solar panels: they cost $\$480\,000$ and save $\$80\,000$ a year on the electricity bill.

1. a) Calculate the payback period of the investment.
2. b) Name two non-monetary benefits that should also be counted in the analysis and explain how you would include them.

The figure shows the initial cost of a sports center's solar installation and the cumulative savings year by year, in thousands of pesos.

1. a) Read from the graph in which year cumulative savings equal the cost.
2. b) Explain what this point means and what happens from then on.

To assess a road improvement, the administration estimates the time drivers will save and assigns it a monetary value per hour.

1. a) Do you think it is reasonable to monetise time? Justify your answer.
2. b) What other effect that is difficult to monetise should be included in the analysis (noise, safety, environment)? Explain how you would address it.

A local municipality with a limited budget is torn between a new library (cost of $\$16\,000\,000$, estimated benefits of $\$20\,000\,000$) and an underground parking lot (cost of $\$12\,000\,000$, benefits of $\$18\,000\,000$).

1. a) Calculate the net benefit and the benefit-cost ratio of each project.
2. b) Which would you recommend and why? Consider which benefits of the library might be undervalued.

A toll highway cost $6\,000$ million pesos. Users pay a total of $500$ million a year and save time valued at another $200$ million annually; maintenance costs $100$ million a year.

1. a) Set up the cost-benefit analysis over $20$ years (without discounting) and decide whether it was a good public investment.
2. b) What would change if the toll deterred half of the expected drivers? Discuss this qualitatively.

'Not everything can be measured in pesos: a park, health or silence are priceless.'

1. a) Explain what problem this objection poses for cost-benefit analysis.
2. b) Defend or criticize the use of cost-benefit analysis in public decision-making using a specific example.