Chapter 9: Distributional Social Impacts

Learning Objectives

After completing this chapter, students should be able to:

  1. Identify stakeholders in the social CBA perspective.

  2. Describe the distribution of costs and benefits from the social CBA.

  3. Calculate the benefits and costs for those with standing in a CBA.

 

There is an equity – efficiency trade-off when utilising cost-benefit analysis as a decision-making tool. In the previous chapter, we evaluated an intervention or project from the social perspective on the aggregate level. At this point, we need to disaggregate the benefits and costs to identify which groups the benefits and costs accrue to. This involves establishing those with standing in a policy or project as highlighted in Chapter 4.

The goal of evaluating the distribution of benefits and costs is to provide information regarding the attractiveness of the project to stakeholders involved. Evaluating the distributional effects allows for the identification of equity issues in CBA (OECD, 2018). This allows for an analyst to determine the social desirability of a policy project or program. Additionally, when evaluating a policy or project based on the market prices, we fail to capture many aspects that are of interest to stakeholders. For example, we fail to capture benefits from employment, government surpluses from taxes and/or subsidies, and external impacts. When implementing the social CBA using the appropriate shadow prices, we capture these impacts indirectly. Disaggregating the effects involves attributing the benefits and costs to sub-groups within the CBA framework. For example, we can identify employment benefits to workers previously unemployed, taxes and subsidies would be received by governments, and external impacts can be attributed to the wider community or society.

At this stage, we assume equal weights to all relevant groups with standing where we measure dollar for dollar the impact the CBA has on each relevant party. This is a limitation of our approach as it does not account for heterogeneity of groups within society. To address this issue, it is possible to re-weight the impacts across the distribution to account for inequality or diminishing marginal utility, to verify the desirability of a policy. [1]

Identify Via Shadow Prices

The easiest method to evaluate and identify the benefits and costs attributable to various sub-groups involves looking at the use of shadow prices within the CBA. We know whenever there is a difference between the market price and the shadow price there must be a group that gains or loses. Specifically, we can evaluate the benefits and costs based on input and output markets as follows:

For an input market:
  • If the market price is greater than the shadow price, the benefit is to the owner of the input.
  • If the market price is less than the shadow price, it is a cost to the user of the input.
For an output market:
  • If the market price is greater than the shadow price, it is a cost to the government or public.
  • If the market price is less than the shadow price, it is a benefit to the government or public.

Therefore, when the shadow price is different from the market price, it is possible to identify the flow of the costs of benefits. Following from these general points outlined above, we can readily determine the benefits and costs that accrue to stakeholders with standing in the CBA.

It is important to pick up every instance of the differences between the market and shadow prices. The easiest way to implement this in a spreadsheet is to subtract the market prices from the social shadow prices. Any positive or negative difference implies a stakeholder with standing is affected and their gain or loss needs to be accounted for.

Identify Via Financial Flows

A second method involves tracking the financial flows. There are two key types: (1) transfers to governments, and (2) lending institutions.

Transfers to and from the Government

This involves following the financial flows to and from the government in the form of taxes, subsidies, or other government expenditure. It is important to note that taxes and subsidies are transfers to the government. Taxes are an inflow (positive), and subsidies are an outflow (negative).

Banks

Loans from banks or other institutional lenders are often captured in the disaggregated CBA. In some instances, we may exclude banks and lenders if the lender is a foreign bank/firm. This is due to jurisdictional considerations discussed in Chapter 4.

 

Aggregated and Disaggregated CBA

It is also worthwhile remembering that when you disaggregate the results of the social CBA, when you add impacts back together it should sum to the aggregate social CBA.

Example 9.1

Example: Gains to Labour

Consider an infrastructure project which involves the purchase of labour for vegetation restoration. To complete the project, we require 10 workers. The market minimum wage for workers is $25 per hour. Each worker is required for 7 hours for a total of 10 working days. If 60% of the workers hired for the project were otherwise unemployed, and their opportunity cost of working is 40% of the market wage, we can calculate cost of the project as follows:

i) The market perspective = -$17,500 (wage \times workers \times hours \times days)

ii) The investor perspective = -$17,500 (wage \times workers \times hours \times days)

iii) The social perspective = -$11,200 (wage \times workers \times hours \times days \times employed + OC \times workers \times hours \times days \times unemployed)

iv) The disaggregated social perspective = Investor perspective (-$17,500) + gains to labour ($6,300) = Social perspective (-$11,200)

 

Example 9.2

Example: Taxes and Externalities

Suppose you have the following information about a single year project under consideration by a local FinTech firm The information is as follows:

  • Benefit = $20,000
  • Costs = $15,500
  • Taxes = $3,000
  • Pollution =$ 2,250

We can identify the perspectives as follows:

– Market Perspective = $20,000 -$15,500 = $4,500 (benefits – costs)

– Investor Perspective = $20,000 -$15,500 – $3,000= $1,500 (benefits – costs – taxes)

– Social Perspective = $20,000 -$15,500 – $2,250= $2,250 (benefits – costs – pollution)

– Disaggregated to:

– FinTech Firm = $1,500

– Government = +$3,000

– Community Costs= -$2,250

The total of this disaggregated social CBA is equal to the social CBA perspective = ($1,500 + $3000 – $2,250) = $2,250

Example 9.3

Example: Producing Widgets

Suppose we have a project with the following information on the production of widgets over the life of a 5-year project.

Table 9.1: Inputs for Widget Project
Input Value
Market Wage (per year) $6,000
Opportunity Cost per year (Workers Leisure) 50% market price
Workers Required Per Year 4
Initial Cost $1,500
Benefit (per unit/per year) $2,500
Units Produced Per Year 10
Discount Rate 5%
Tax Rate 25%

We can input the information into Excel to calculate the (i) market perspective, (ii) investor perspective, (iii) social perspective, and the (iv) disaggregated social perspective as follows:

Table 9.2: The Results of the Four Perspectives of CBA
Year 0 1 2 3 4 5 NPV
(i) Market Benefit 25000 25000 25000 25000 25000
Cost -1500
Operating Cost -24000 -24000 -24000 -24000 -24000
Net Private Benefit Before Tax -1500 1000 1000 1000 1000 1000
(ii) Investor Tax 250 250 250 250 250
Net Private Benefit After Tax -1500 750 750 750 750 750 $1,747.11
(iii) Social Benefit 25000 25000 25000 25000 25000
Cost -1500
Operating Cost -12000 -12000 -12000 -12000 -12000
Net Social Benefit -1500 13000 13000 13000 13000 13000 $54,783.20
(iv) Disaggregated
 – Firm -1500 750 750 750 750 750 $1,747.11
 – Workers 12000 12000 12000 12000 12000 $51,953.72
 – Government 250 250 250 250 250 $1,082.37
Consistency Check 0 0 0 0 0 0 $54,783.20

To replicate this result you can download the Excel spreadsheet here: Example9_3

 

 

Revision

 

 

Summary of Learning Objectives

  1. By following financial flows and shadow prices we can identify the various stakeholders impacted by a policy or project.
  2. We can disaggregate the result from the social CBA to identify who wins and who loses from a policy. When we aggregate the result from the disaggregation, we should attain the same result of the social CBA.
  3. We can calculate the benefits and costs for the disaggregated CBA by looking at the differences between the market prices and shadow prices, along with financial flows (such as taxes, subsidies, and loan repayments to lenders).

 

References

OECD (2018), Cost-Benefit Analysis and the Environment: Further Developments and Policy Use, OECD Publishing, Paris, https://doi.org/10.1787/9789264085169-en.

Weisbach, D. A. (2015). Distributionally Weighted Cost–Benefit Analysis: Welfare Economics Meets Organizational Design. Journal of Legal Analysis, 7(1), 151-182.

  1. Unweighted CBA can produce a decision that may reduce the social welfare, whereas if distributional weights are used the same policy may increase social welfare (Weisbach, 2015).  However, the use of distributional weights is outside the realm of what is covered here. ↵

Licence

Icon for the Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License

Social Cost Benefit Analysis and Economic Evaluation Copyright © 2022 by The University of Queensland is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.

Share This Book