Cost Benefit Analysis

There are a variety of reasons for wanting to measure the costs and benefits from policy and other changes in economic activity. Governments want to measure the impact of their policy changes on society as a whole, while private agents focus on the impact they have on their own welfare and the welfare of those they care about. In markets subject to tax and other distortions market prices are not normally reliable measures of the social valuation of goods and services. Thus, they cannot be used to evaluate the social impact of policy and other changes. Instead, we derive shadow prices of goods and services to look through market distortions and measure social valuations. When changes in economic activity are evaluated using these shadow prices they provide measures of the social impact of policy and other changes. This course summarises the information provided by different welfare measures for single consumers and then looks at ways to aggregate them over consumers. In doing so, we examine ways to account for distributional effects in policy evaluation. Tax reform and the optimal provision of public goods are examined as applications of these shadow pricing rules.