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ECON 361: Cost Benefit Analysis and Project Evaluation

Module 01: Introduction


5. Module 01 Summary

Slide 1. Course Overview


Before proceeding to the second module of the course, now is a good time to step back and take a
holistic view of course content and course objectives. First, we will overview course content. From a
high level, the course consists of twelve modules, and content is very accumulative in nature. That is,
learnings from one module are needed to secure an understanding of subsequent modules. As such,
it is very important to ensure you fully understand all concepts within a module before proceeding.
Remember to keep up with the course schedule. Be sure to review and learn modules on a weekly
basis. Economic topics such as CBAs can be very deceiving. Difficult, complex topics often appear
easy or straightforward at the onset. Do not be fooled by this perception. Make sure you keep up
with the course schedule and you fully understand module content before proceeding.

Slide 2. Course Content Overview


Module one introduces cost benefit analysis, which is often referred to as CBA, and the four types of
CBAs. This module introduces the nine conventional steps within a CBA. These steps are really
foundational to the course. Module one also articulates some of the major limitations within the CBA
process. Module two describes how the nine conventional steps within a CBA map to a CBA
modeling process. This process is critical to the course, as subsequent modules provide richer
details on components within the CBA modeling process. The following pictorial of the CBA modeling
process is explained in module two. This illustration is referenced at the end of every module as a
checkpoint reference for what we have just learned and what is upcoming. Module two also
describes the role of stakeholders and subject matter experts in the CBA modeling process.

Slide 3. Course Content Overview


Before diving into the components within the CBA modeling process, key concepts used within the
modeling process are reviewed, which encompasses modules three and four. Module three focuses
on the key concepts of cash discounting and decision-making criteria used within the CBA modeling
process, while module four focuses on several concepts related to efficiency within the CBA modeling
process. Those concepts being willingness-to-pay, opportunity cost, pareto efficiency, consumer and
producer surplus, compensating and equivalent variation. Again, modules three and four provide the
learning and basic tools needed and leveraged in the CBA modeling process. Module five focuses on
efforts needed within the first step of the CBA modeling process, which is conceptual design. In this
module, we learn how to assess the impacts of decisions in primary markets in both efficient and
inefficient markets. Much like module five, module six focuses on efforts needed within the first step
of the modeling process, but places emphasis on secondary markets. That is, in this module, we
learn how to assess the impacts of decision in secondary markets, in both efficient and inefficient
markets. Module seven is the first of five modules in the course that focus on various approaches
leveraged within the valuation and estimation step of the CBA modeling process, a step which many
consider the heart of a CBA. Module seven introduces the concepts of predicting and monetizing
values at a summary level, and highlights the impacts of predicting and monetizing values.

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Slide 4. Course Content Overview
Module eight focuses on an indirect method, while module nine focuses on an implicit method. Both
methods are used for valuation and estimations. Module ten discusses specific shadow prices and
approaches for valuation and estimations, while module eleven discusses a pilot approach for CBA
valuations with an emphasis on understanding the use of pilot projects in CBAs and alternative
designs for CBA projects. Again, modules seven to eleven are various approaches leveraged within
the valuation and estimation step of the CBA modeling process. The course closes with a module on
risk and uncertainty. This course section discusses the sources of uncertainty in approaches for
assessing the degree of uncertainty along with expected returns to decisions. The final step of the
CBA modeling process is also reviewed within this last module of the course.

Slide 5. Module Closing Approach


It is also important to note that from module two onward, each module closes with a brief summary of
major points addressed within the module, which are salient concepts that require a full
understanding of before proceeding to the next module. Also, a set of additional questions and
solutions applicable to the module are located at the end of every module. This ensures students
have the opportunity to practice module learnings. Additional questions are first provided, and then
solution sets follow. Students are encouraged to try questions first by themselves before reviewing
the solution set.

Slide 6. Practice Question and Solution

We will walk through an example of a practice question and solution that could apply to this module.
Read the question first and try to answer yourself and then review the solution.
Consequences of a guardian perspective entail the following: this view downplays or ignores non-
financial social benefits and costs. This view interprets the meaning of costs idiosyncratically.
Resources owned by government tend to be viewed as free goods. This view ignores costs not borne
by its own level of government. It also treats subsidies from other levels of governments as benefits.
And finally, this view wants to use a high social discount rate.
Consequences of a spender perspective entail the following: Expenditures on constituents are viewed
as “benefits” rather than costs. Transfers received by constituents are viewed as benefits. Some
costs are viewed as benefits, this often means support for any project rather than a “do nothing”
status quo. Utilized resources that are owned by government are viewed as having no cost. Large,
capital-intensive projects with big sunk costs are favoured. This view also tends to view market
allocations as inappropriate, and does not accept that project resources are diverted from other
productive uses. And finally, this view favors a low discount rate.

Slide 7. Course Objectives


Now, moving on to course objectives. Upon completion of the course, the following objectives will be
achieved by every student. First, understand the process of CBA, and be aware of CBA controversy
and limitations. Second, learn key concepts leveraged in the CBA process, specifically willingness-
to-pay, opportunity cost, pareto efficiency, consumer and producer surplus, compensating and
equivalent variation, and cash discounting. Third, learn the CBA process flow and supporting
conventional steps. Fourth, understand and assess impacts of decisions in primary and secondary
markets that are efficient or inefficient within the CBA process. Fifth, learn approaches for the
valuation of non-market goods within the CBA process. Sixth, explain how uncertainty enters into the
CBA process, and how to apply the CBA process to mitigate associated risk. And finally seventh,
analytically review a CBA or CBA journal article and provide an assessment of the corresponding
CBA strengths and weaknesses with supporting justification.

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Slide 8. Copyright
No audio.

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