Principles and Standards for Benefit–Cost Analysis

Principles and Standards for Benefit–Cost Analysis

Edited by Scott O. Farrow and Richard Zerbe, Jr.

Benefit–cost analysis informs which policies or programs most benefit society when implemented by governments and institutions around the world. This volume brings together leading researchers and practitioners to recommend strategies and standards to improve the consistency and credibility of such analyses, assisting analysts of all types in achieving a greater uniformity of practice.

Chapter 6: Developing general equilibrium benefit analyses for social programs: an introduction and example

H. Allen Klaiber and V. Kerry Smith

Subjects: economics and finance, public sector economics, valuation

Extract

This chapter describes an approach for incorporating general equilibrium effects into benefit–cost analyses of social programs. To make our description tangible we selected a specific example: the evaluation of reductions in the resources available for public primary education. To highlight the general equilibrium effects of exogenous reductions in the resources used to produce education and its effect on measures of the quality of education, we use a locational sorting model applied to school districts in Maricopa County, AZ, USA. Several of these districts experienced teacher cuts in the 2009–10 school year. These cuts provide a tangible basis for illustrating how the model would work. General equilibrium effects allow non-market feedbacks to be aligned with the interrelationships between markets that are widely acknowledged in conventional multimarket analyses. In the context of sorting models, general equilibrium effects influence our understanding of both the severity and distribution of changes in household well-being arising as a result of changes to local social programs. Most discussions of the distinctions between partial equilibrium (PE) and general equilibrium (GE) frameworks for benefit–cost analysis focus on policies that directly alter the prices of marketed goods and services. Many follow the seminal contributions described in Just et al. (2004).

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