• Measuring the benefits associated with this project is more difficult than measuring the costs because it is more difficult to use market values to place a value on the benefits.
Imperfect Markets
• Suppose, however, that for some reason there is unemployment among construction workers—perhaps state
law u c o n w o r k e r s mandates a mini mum wage of $20 for constructi on workers.3 If $20 is above the equilibrium wage in the construction sector, there will be some workers who would happily work at the prevailing $20 per hour wage but who cannot find jobs at that wage.
• So the $10 million future stream of maintenance costs has a present discounted value of 143 million (10 million/0.07 =143 million).
8.2 Measuring the Benefits of Public Projects
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8.1.2 Measuring Current Costs
The social marginal cost of any resource (e.g., the asphalt, labor, and future maintenance costs) is its opportunity cost: the value of that input in its next best use.
Perfect market
1. Consider first the asphalt.
the
opportunity cost is the market price (If the price of a
bag of asphalt is $100, the asphalt costs for the project
Valuing Driving Time Saved
• The first benefit associated with this project is that both producers and consumers will save travel time.
• Valuing Driving Time Saved（three ways） • 1. Using Market-Based Measures to Value Time: Wages • 2. Using Survey-Based Measures to Value Time: Contilion)
2. the labor market .
If the market wage
for construction workers is $10 per hour, then the
opportunity cost of the labor for the project is $10
Cost-Benefit Analysis
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8.1 Measuring the Costs of Public Projects
8.2 Measuring the Benefits of Public Projects
8.3 Putting It All Together
8.4 Conclusion
Measuring Future Costs
• present discounted value If a private firm were making an investment decision, the proper discount rate should represent the opportunity cost of what else the firm could accomplish with those same funds. If there is an existing investment that yields 10% per year with certainty, and the firm pays a tax rate of 50%, then this investment would net the firm a return of 5% per year. the government counts that full 10% as its opportunity cost. 10% should be used as a discount rate.
• What is the opportunity cost of the time of any unemployed workers you bring onto the job?
• the opportunity cost for unemployed construction workers is only $10 per hour, not $20 per hour. If half of the million man-hours that are required for this job come from workers who are unemployed, then the opportunity cost of hiring 1 million worker hours is 20 * 500,000