Question 1.

Benefit-cost analysis experts agree that to the extent you can quantify benefits and costs, you should do this. However, some people complain that there are many things that cannot be quantified, so they resist engaging in quantitative benefit-cost analyses.

Certainly, some things are harder to quantify than others. For example, quantifying potential customer satisfaction with a new product your company plans to produce is not easy to do. Nonetheless, by conducting surveys of potential customers, engaging in focus group studies, and testing prototypes of the product on customers, you can develop a reasonable quantitative sense of possible customer satisfaction with the product. The point is that ultimately, everything can be quantified. The real issue is whether your attempt at quantification is valid and really reflects what you want to measure.

Describe how you might be able to measure the benefits and costs of implementing the 9/80 schedule described below:

Traditionally, employees work 8-hour days for 5 days a week. However, many companies are offering flexible work hours including the 9/80 schedule. The 9/80 schedule allows employee to work for 9 hours every day and get every other Friday off.

Question 2.

In building a large hydroelectric dam in Batundaland, a substantial portion of the country's electric power needs can be met. However, the dam will create a lake that will be the breeding grounds of snails that lead to a devastating disease called bilharzia, and this disease can affect a significant portion of the population. The World Bank is asked to provide loans to fund this project. The World Bank requires that a benefit-cost analysis be conducted on all projects it funds that assess the impacts of the project on society (including health impacts).

Discuss the aggregation problems that might be encountered in designing this benefit-cost analysis.

[Reference slide 5-22]

The Aggregation Problem in Measuring Costs and Benefits

In computing costs and benefits, decisions must be made over what data should be included in the BCA and how it should be weighted:

o Aggregation over people: Should benefits going to rich people be weighted differently than those going to the poor? Should children, retirees, the disabled, and criminals be treated equally?

o Aggregation over products: How do you compare costs in one form (e.g., concrete for a dam) with benefits in another (e.g., electricity generated by the dam)? This is particularly troublesome when there are limited markets for a good.

o Aggregation over time: How do you compare present costs with future benefits?

o Aggregation over states of uncertainty: How should risk and uncertainty be factored into the analysis?