IDEC8088 Applied Economics: Cost/Benefit Analysis

Offered By	International and Development Economics Program
Academic Career	Graduate Coursework
Course Subject	International and Developmental Economics
Offered in	Second Semester, 2010 and Second Semester, 2011
Unit Value	6 units
Course Description	The course will commence with an explanation of the financial analysis of projects and move on to provide students with an understanding of the theoretical rationale for modern cost benefit analysis (CBA). Emphasis will be placed on case studies with particular stress on the handling of shadow prices, and opportunities will be provided to give students a thorough working knowledge of its application in developing countries. IDEC 8088 is a course in CBA for Masters and PhD Part A students, and thus the assessment will be different from IDEC 8001 (for Graduate Diploma students).
Learning Outcomes	Students will have the knowledge and skills to analyse, critique, and evaluate a Cost-benefit report and to select projects that would improve the welfare of the economy as a whole.
Indicative Assessment	There will be tutorial exercises focus on the practical application, mid-term and final examinations focus on the conceptual framework of CBA. They will count towards the grade as follows: Tutorial exercises 20% Mid-term 25% Final exam 55% Tutorial exercises will be assigned whenever is appropriate. The aim is to provide students hand-on experiences in using spreadsheets for actual cost benefit calculations. The assessments for Masters and PhD students will be different from those for Graduate Diploma students, for instance, they may require to answer have different examination questions.
Workload	Three hours and a half contact hours per week, including 2.5 lecture hours and one hour tutorial. Consultation is by appointment. On average, students are expected to spend five to six hours on average outside of contact hours to complete the course.
Course Classification(s)	AdvancedAdvanced courses are designed for students having reached 'first degree' level of assumed knowledge, which provide a deep understanding of contemporary issues; or 'second degree' and higher levels of knowledge; or for transition to research training programs. and SpecialistSpecialist courses are designed for students having reached 'first degree' level of assumed knowledge, which provide for the acquisition of specialist skills; or 'second degree' and higher level of knowledge; or for transition to research training programs; or knowledge associated with professional accreditation.
Areas of Interest	Economics
Eligibility	Students with non-economics background are encouraged to consult the lecturer-in-charge regarding the eligibility and assumed knowledge for the course.
Assumed Knowledge and Required Skills	Knowledge at introductory level of microeconomics is required.
Prescribed Texts	Perkins, F.C. (1994). Practical Cost Benefit Analysis: Basic Concepts and Applications. Macmillan, Melbourne.
Indicative Reading List	Boardman, A.E. et al. (2006). Cost Benefit Analysis - Concepts and Practices, Third Edition, Prentice Hall, NJ. Sinden, J.A. and Thampapillai, D.J. (1995). Introduction to Cost Benefit Analysis, Longman, Melbourne. Campell, H. and R. Brown (2003). Benefit-Cost Analysis: Financial and Economic Appraisal Using Spreadsheets, Cambridge. Nas, T.F. (1996). Cost Benefit Analysis - Theory and Application. Sage, California.
Programs	Master of Health Economics, Master of Environment, Master of Environmental Management and Development, Master of International and Development Economics, and Master of Environmental and Resource Economics
Other Information	Delivery Mode: the course will be delivery "on campus" with materials posted in the WebCT. Course Outline The purpose of this course is to develop a sound understanding of the basic tools of financial and economics analysis of projects and the theoretical framework for modern cost benefit analysis (CBA). The broad purpose of CBA is to help project evaluation and social decision making. More specifically, the objective is to facilitate the more efficient allocation of society's resources. Emphasis will be placed on case studies with particular stress on the handling of environmental issues, and applications in the context of developing countries. Pre-requisite: introductory microeconomic theory 1. Overview Introduction to CBA The role and objective of financial and economic analyses of projects Individual versus social welfare 2. The valuation of financial costs and benefits When to undertake financial analysis A primer on welfare economic concepts Market prices as a measure of economic value The valuation of project cash flow The valuation of project costs 3. Time preference, discounting and discounted project selection criteria Time preference Comparing projects with different time frames: discounting Real or nominal discount rate Discounted project selection criteria 4. The rationale for economic cost benefit analysis Neoclassical theory Market failure Government intervention Shadow versus economic prices 5. Economic valuation in a closed economy Measuring changes in economic welfare: consumer and producer surplus Economic or shadow pricing Measuring economic benefits and costs of project with no distortion Measuring economic benefits and costs with distortions 6. Measuring economic benefits, including externalities Externality Internalising the externality The valuation of externality Case studies of measuring benefits in transportation and environmental projects 7. Economic valuation of tradeables Traded versus non-traded goods Valuation of tradeables whose price will not change as a result of the project Valuation of tradeables whose price will change as a result of the project Valuation of tradeables in an economy with distortion Potentially traded goods 8. Economic valuation of foreign exchange The premium on foreign exchange The shadow exchange rate Two approaches in valuating traded good with foreign exchange premium 9. Economic valuation of primary factors - labour, land and natural resources Labour as a non-traded factor in fixed supply Labour market in developing countries A common shadow wage rate formula Shadow price of land Shadow price of natural resources 10. Public goods and social services Definition of public goods The valuation of public goods Applying CBA to environmental issues Relevance of CBA to environmental management Example of the valuation of externalities Treatment of non-renewable resources Problems with CBA Applying CBA to transport issues Relevance of CBA to transport projects Estimation of benefits The valuation of travel time savings 12. Social discount rate Social discount rate with no distortions Social discount rate with distortions Social discount rate as the weighted cost of capital The decision-maker approach to social discount rate 13. Social cost benefit analysis Purpose Distributional weights Various approaches to social cost benefit analysis 14. Handling risk and uncertainty Sources of uncertainty in project appraisal Risk and uncertainty Sensitivity analysis Incorporating uncertainty in CBA 15. Overview and conclusions References Australia Department of Finance. (1991). Handbook of Cost-Benefit Analysis, Australian Publishing Service, Canberra. Dinwiddy, C.L. (1996). Principles of Cost-Benefit Analysis for Developing Countries, Cambridge University Press. Gramlich, E. (1997). A Guide to Benefit-Cost Analysis, Waveland Publishing, NJ. Hanley, Nick and Clive L. Spash (1998). Cost-benefit analysis and the environment, Edward Elgar. Harvey, M. (2003). 'Measuring the benefits of new transport services', Paper presented in the 25th Australasian Transport Research Forum: Incorporating the BTRE Transport Policy Colloquium, Bureau of Transport and Regional Economics, Canberra. Jenkins, G.P. and Harberger, A.C. (1991). Program on Investment Appraisal and Management Manual - Cost Benefit Analysis of Investment Decisions, Cambridge, Mass., Harvard Institute for International Development. Little, I.M.D. and Mirrlees, J.A. (1974). Project Appraisal and Planning for Developing Countries, London, Heinemann Educational Books. Nas, T.F. (1996). Cost Benefit Analysis - Theory and Application. Sage, California. Pearce, D.W. and Nash, C.A. (1981). The Social Appraisal of Projects: A Text in Cost Benefit Analysis, Macmillan, London. Sassone, P.G. (1978). Cost-Benefit Analysis: A Handbook, Academic Publisher. UNIDO (1972). Guidelines for Project Evaluation, New York, United Nations. Zerbe, R.O. and Dively, D.D. (1994). Benefit Cost Analysis in Theory and Practice, Harper Collins, NY. Lecture Notes Access to lecture notes are available via WebCT. To login please click here.
Academic Contact	Dr Amy Liu

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