Professional Documents
Culture Documents
ANALYSIS
“It is best to think of the cost-benefit approach as a way
of organizing thought rather than as a substitute for it.”
— Michael Drummond
Cost-Benefit Analysis
E(B) = i prob(B=bi) bi
where
prob(B=bi) is the probability that the benefit is worth $ bi .
Knee Injury
That is, if
$50 will occur with probability 0.6,
$100 will occur with probability 0.2, and
$150 will occur with probability 0.2,
No Treatment = 25.5%
With Zidovudine Treatment = 8.3%
MSB = d TSB/d Q
MSC = d TSC/d Q
Q = quantity of a publicly provided good or service
PV = F/(1 + r),
where F is a fixed sum of money to be received next year.
Discount Rate
•(benefit
represents productivity gains from extending life
side)
or
•productivity losses from early death (cost side)
•output
for society as a whole, represents a loss in national
due to mortality
Method often used in court cases, e.g., court awards
the family of a man who dies at 35 in a car accident
the amount of his expected PV of lifetime earnings =
$650,000
Problems with human capital approach:
•homemakers,
People who are not working for pay (e.g.,
students, retirees) are valued at 0!
(Even for the employed, time away from the job is
valued at 0.)
•social
Implies that people with higher wages have higher
value.
•e.g.,Doesdiscrimination.
not account for labor market imperfections,
2. Willingness-to-pay (WTP) Approach
•value)
Measures total value of life (not just labor market