Economic Analysis of Public Policy

Yoshitsugu Kanemoto

Course Description

The objective of the course is to enable students to conduct policy analysis for real-world policy problems. The students are expected to learn how to design and conduct a policy research for a given policy problem and to evaluate policy alternatives with solid understanding of the theoretical foundation of cost-benefit analysis and full recognition of their effectiveness and limits.
Topics covered are (1) the theoretical foundation of cost-benefit analysis, (2) concepts and tools in cost-benefit analysis such as the social discount rate, risk and uncertainty, existence value, hedonic and travel cost methods, CVM, evaluation by social experiments, (3) application of cost-benefit analysis and cost-effectiveness analysis to public projects and regulation policies, among others. Students are required to conduct real-world case studies.
This course requires good understanding of elementary economics and statistics but does not pursue sophisticated economic analysis.  Prerequisites are (1) Microeconomics for public policy, (2) Statistical Method, or their equivalents.

Textbooks
Boardman, A. E, D.  H. Greenberg, A. R. Vining and D. L. Weimer. Cost-Benefit Analysis: Concepts and Practice, Fourth Edition. Prentice-Hall, Upper Saddle River, NJ, 2010. (International Edition)[BGVW]

Student Case Study Reports 2015
Comments on the reports
Nuclear; Sea Ambulance; Alternate Road

Student Case Study Reports 2014
Comments on the reports
U-Pass; Southern Expressway; URS Campus; Sao Paolo Subway

Student Case Study Reports 2013
Comments on the reports
Gun Control, Three Gorges Dam, , License Plate Auction

Student Case Study Reports 2012
Comments on the reports
Chennai Metro; U-Health (pdf), : California HSR; Tokyo Skytree; Birthing Home

Student Case Study Reports 2011
Comments on the reports
Deep-sea mining of methane hydrate located around Japan’s EEZ
Micro–Hydropower Plant in Nepal
Melamchi Water Supply Project
Building a Village-run Vegetable Processing Factory in Shanghai

Course Outline

Dates of lectures: 04/07, 04/14, 04/21, 04/28, 05/12, 05/19, 05/26, 06/02, 06/09, 06/16, 06/23, 06/30, 07/07, 07/21

Schedule (Tentative, subject to change)

  1. Introduction;Public Policy, Policy Analysis, and Cost-Benefit Analysis; Market and Government Failures
  2. Introduction to CBA, Valuing benefits in Primary Markets
    HW1 Answer Sheet
  3. Valuing benefits in Secondary Markets
    HW2 Answer Sheet
  4. Conceptual Foundations of Cost-Benefit Analysis
    HW3 Answer Sheet
  5. Discounting; Student CBA projects at GraSPP
  6. Predicting and monetizing impacts; Market failure;
    Estimating Benefits: Market Demand Function
    HW4; Excel File for HW4; Answer Sheet
    Mini CBA team formation; Mini CBA project proposal version 1
  7. Policy Evaluation Cases Guest Lecture: Transportation Investment
    Mini CBA Framework
  8. Estimating Benefits: Experiments and Quasi Experiments,
    Estimating Benefits: Indirect Market Methods
  9. Estimating Benefits: Contingent Valuation;
    Estimating Benefits: Shadow prices from secondary sources
  10. Mid Term Quiz
    Mini project outline
  11. Risk and uncertainty, Option Value, Mini project framework discussions
  12. Cost-effectiveness analysis; CBA Bibliography; Mini project framework discussions
    References for public transit: Public transit benefits and costs; Costs of public transits; World Bank TRN-5 to TRN-26 Economic Evaluation Notes
  13. Social discount rate; Mini project outline discussions
  14. Existence value; Mini project discussions
  15. Distributional Weights; Mini project discussions
  16. Final Presentation (07/21)
    Schedule
    Presentation Evaluation Form (due 07/20)
    Presentation files:
  17. Mini Project Final Report (due 08/05) Report Guidance PAE Writing Guide
    Final Reports:
    Final Report Evaluation Form (due 08/09)

Reading List

Introduction: How to do Policy Analysis  

Weimer, David L. and Aidan R. Vining. Policy Analysis: Concepts and Practice. 5th ed., Longman, Upper Saddle River, NJ, 2010. Chs. 1 and 2. [WV]
BGVW Chapter 1 "Introduction to Cost-Benefit Analysis"
Posner, R.A., “Cost-Benefit Analysis: Definition, Justification, and Comment on Conference Papers,” in Adler, M.D. and E.A. Posner, Cost-Benefit Analysis - Legal, Economic, and Philosophical Perspectives, University of Chicago Press, 2000.

Foundations of Cost-Benefit Analysis

BGVW Chapter 3 "Basic Microeconomic Foundations of Cost-Benefit Analysis"
Kanemoto, Y., (2011), "Surplus Theory," A Handbook of Transport Economics, Edited by A. de Palma, R. Lindsey, E. Quinet, and R. Vickerman, Edward Elgar Publishing, Cheltenham Glos, UK, 479 - 499.

Valuing benefits and costs

BGVW Chapter 4 "Valuing Benefits and Costs in Primary Markets"
BGVW Chapter 5 "Valuing Benefits and Costs in Secondary Markets"
Kanemoto, Y., " Urban Transport Economic Theory,” A Companion to Urban Economics, Edited by Richard J. Arnott and Daniel P. McMillen, Blackwell Publishing, Oxford, UK, 245-260.
Kanemoto, Y., (2011), "Surplus Theory," A Handbook of Transport Economics, Edited by A. de Palma, R. Lindsey, E. Quinet, and R. Vickerman, Edward Elgar Publishing, Cheltenham Glos, UK, 479 - 499.
World Bank Transport Notes No. TRN-5 (Framework), 14 (Operating costs), 15 (Time savings), 16 (Accident costs)

Discounting

BGVW Chapter 6 "Discounting Future Benefits and Costs"
World Bank Transport Notes No. TRN-6 (When and How to Use NPV, IRR and Modified IRR)

Predicting and monetizing impacts

BGVW Chapter 11 "Predicting and Monetizing Impacts"

Estimating Benefits: Market Demand Function

BGVW Chapter 13 " Valuing Impacts from Observed Behavior: Direct Estimation of Demand Curves"

Estimating Benefits: Experiments and Quasi Experiments

BGVW Ch.12 Valuing Impacts from Observed Behavior: Experiments and Quasi Experiments
Khandker, S.R., G. B. Koolwal, and H. A. Samad, Handbook on Impact Evaluation: Quantitative Methods and Practices, World Bank, 2009. (Randomized evaluations, Matching methods, Double difference methods, Instrument variable methods, Regression discontinuity design and pipeline methods)

Estimating Benefits: Indirect Market Methods

BGVW Chapter 14 "Valuing Impacts from Observed Behavior: Indirect Market Methods"

Estimating Benefits: Contingent Valuation

BGVW Chapter 15 "Contingent Valuation: Using Surveys to Elicit Information about Costs and Benefits"
Kolstad, C.D., (1999), Environmental Economics, Oxford Univ. Press, Oxford, England.

Estimating Benefits: Shadow prices from secondary sources

BGVW Chapter 15 "Shadow Prices from Secondary Sources"

Risk and uncertainty

BGVW Chapter 7 "Dealing with Uncertainty: Expected Value, Sensitivity Analysis, and the Value of Information"
BGVW Chapter 8 "Option Price and Option Value"

Cost-effectiveness analysis

BGVW Chapter 18 "Cost-Effectiveness Analysis and Cost-Utility Analysis"

Social discount rate

BGVW Chapter 10 "The Social Discount Rate"

Existence value

BGVW Chapter 9 "Existence Value"

Distributional Weights

BGVW Ch.19 Distributionally weighted cost-benefit analysis

General references

Other textbooks on CBA

Belli, P. et al. Economics Analysis of Investment Operations, World Bank Institute, 2001

Broader approaches to policy analysis

Weimer, David L. and Aidan R. Vining. Policy Analysis: Concepts and Practice. 5th ed., Prentice Hall, Upper Saddle River, NJ, 2010. [WV]
Khandker, S.R., G. B. Koolwal, and H. A. Samad, Handbook on Impact Evaluation: Quantitative Methods and Practices, World Bank, 2009.

Theoretical Foundation of CBA

Transportation
Small, K. A., “Project Evaluation,” in Essays in Transportation Economics and Policy: A Handbook in Honor of John R. Meyer, Ed. by J. Gomez-Ibanez, W. B. Tye and C. Winston, The Brookings Intsitution, Washington D.C., 1999.
Quinet, E. and R. Vickerman, Principles of Transportation Economics, Edward Elgar, 2004. Chapter 7.
Textbooks in microeconomics
Varian, H. R., Microeconomic Analysis, Third Edition, W.W. Norton & Company, Inc., New York, 1992. Chapter 10 Consumers’ Surplus, Chapter 12 Econometrics
Jehle, G.A. and P.J. Reny, Advanced Microeconomic Theory, Second Edition, Addison Welsley, Boston, 2001. Chapter 4 Partial Equilibrium
Theoretical foundation of CBA
Just, R.E., D. L. Hueth, and A. Schmitz, The Welfare Economics of Public Policy, Edward Elgar, Cheltenham, UK, 2004.
Boadway, R. and N. Bruce, Welfare Economics, Lightning Source Inc, 1985. A classic.

The role of CBA in policy making

Adler, M.D. and E.A. Posner, Cost-Benefit Analysis - Legal, Economic, and Philosophical Perspectives, University of Chicago Press, 2001.
Sunstein, C.R., Risk and Reason - Safety, Law, and the Environment, Cambridge University Press, 2002.

Guidelines and Manuals

US Department of Transportation, Economic Analysis Primer, Federal Highway Administration, Office of Asset Management, 2001.

World Bank, Transport Notes TRN-5 through TRN-26: Economic Evaluation Notes, 2005.

UK: COBA11 (Economic Assessment of Road Schemes)
http://www.dft.gov.uk/stellent/groups/dft_control/documents/homepage/dft_home_index.htm

AASHTO (2003), User Benefit Analysis for Highways Manual, American Association of State Highway & Transportation Officials.

US OMB Guidelines
Circular A-094 Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs
Circular A-4 "Regulatory Analysis" (September 17, 2003)

Reports to the Congress
http://www.whitehouse.gov/omb/inforeg/regpol-reports_congress.html

UK Guidelines
Green Book, Annex (PDF)
Regulatory Impact Assessment, Cabinet Office, UK
http://webarchive.nationalarchives.gov.uk/20060213205513/cabinetoffice.gov.uk/regulation/ria/