SYLLABUS

AEDE 631

Benefit Cost Analysis

Autumn Quarter, 2002

T Th 10 a.m. - 12:18 p.m., 202 Animal Science Bldg.

Call # 00280-8,   5 hours UG

Instructor:                  Dr. Fred J. Hitzhusen, Professor

                                 Dept. of Agricultural, Environmental, and Development Econom­ics

                                 Room 226, Ag Administration Bldg.   Phone:  292-6244

                                 E-mail:  Hitzhusen.1@osu.edu

Pre-requisites:            Minimum of 10 hours of economic principles, AEDE 531 or per­mission of instructor.

                                                        Objectives and Procedures

Objectives:                Students will develop a basic understanding of the underlying theory and techniques of benefit-cost analysis and application, par­ticularly to development and conservation projects.  The specific objec­tives include:

                                 1.     a brief introduction and overview of public sector eco­nom­ics

                                 2.     basic development and illustration of key benefit-cost con­cepts and estimation techniques

                                 3.     application of foregoing tools to analysis of cases on agriculture and infrastructure development, natural  re­sources/environmental conservation and human health.

Format:                     Two 2 ½ hour class periods each week will be divided between lecture-discussion (75%) and student team case activities (25%).  Team case options include: economics of dam and toxics removal from rivers in the North Ease U.S., valuing wildlife habitat, rural landscapes and economics of wetlands mitigation in Ohio, Large dams in developing countries, household energy and fuelwood plantations in India and Africa, etc.  Benefit-cost estimation techniques will be developed and illustrated with numerous cases in lecture as well.

Grading:                    Students will be graded on two problem sets (35%), a written abstract/critique of a BCA application from Section 3 of “Outline and Readings” (10%), team case study involving 3-5 students per team (30%), and final exam (25%).

References:                The majority of the core readings for development and appli­cation of the tools of benefit-cost analysis are included in a COP-EZ reader and a text:

                                 1.     Hanley, Nick and Clive L. Spash, Cost-Benefit Analysis and the Environment, Edward Elgar, Northhampton, MA, USA, 1993.

Other readings for the development and application of bene­fit-cost analysis will be drawn from a variety of sources and will be avail­able on Ag Library Reserve.

                              Outline and Readings

1.    Introduction to Public Sector Economic Analysis (2 weeks)

       -       Public and private sectors compared

       -       Market failure and collective action

       -       Evolution of BCA (brief history)

       -       Public choice view of politics

       -       Identification of key issues, programs and projects, cases

       Core Readings:  (*indicates in Reader)

-         *Haveman, R.H., The Economics of the Public Sector, Chapters 2-4

-         Hanley & Spash, Cost-Benefit Analysis ...... Chap. 1, "Introduc­tion"

-         *Hitzhusen, F.J., "Cost-Benefit Analysis: A Cornerstone or Achilles Heel of Social Science," AERS, 1989.

-         Hufschmidt, M.W. “Benefit Cost Analysis” 1933-1985”, UNC.

-         Randall, Alan "Why Benefits and Costs Matter," Choices, 2nd Quarter, 1999, pp. 38-41.

       -       Video on CBA of Road Project in Africa (USAID)

2.    Cost-Benefit Concepts and Estimation (7 weeks)

       -       Principle of maximum social gain

       -       Pareto basis of benefit-cost analysis

       -       Incidence of social gains and costs - equity

       -       Economic surplus measurement

       -       Discount rate

       -       Investment criteria

-           Labor shadow pricing

-           Foreign exchange shadow pricing

       -       External effects, environmental and health services

                       @  Definitions, natural resource, environmental and health concep­ts

                       @  Property rights and safe minimum standards

@  Measurement (e.g., travel cost, hedonic pricing, contingent values and clean-up, treatment and avoidance costs)

       -       Benefit transfer and capture

       -       Risks and uncertainty

       Core Readings:

-         Hanley and Spash, Chapter 2, "Welfare Foundations of CBA"

-         *Herfindahl and Kneese, Economic Theory of Natural Resources, "Formal Welfare Economics," pp. 40-54.

-         *Mishan, E.J.  Economics for Social Decision: Elements of Cost-Benefit Analysis, Chaps. 1-4, 5 & 8, 21-26, 9, 15-17.

-         *Burkhead and Miner.  Public Expenditure, "The Discount Rate," pp. 228-236, and Hanley and Spash, Chapter 8.

-         *Boardman et at “Shadow Prices: Applications to Developing Countries,” Cost Benefit Analysis Concepts and Practice, pp. 417-430.

-         *Fontaine.  "The Social Price of Labor," pp. 58-74.

-         *Whitby.  Rural Resource Development, pp. 40-45.

-         Hanley and Spash, Chapters 6, 5, 4, 3, 7, 9 and 14

-         Hitzhusen, F.J., Lauren Friedman and Kythrie Silva, "Hedonic Price and Travel Cost Estimation of Stripmine Impacts on Lake-Based Property and Recreation Values," ESO 2376, Dept. of Ag Economics, Ohio State University, Sept. 1997.

-         Sohngen, Brent et al. “Tools of the Trade: Placing a value on the Great Lakes Environmental Benefits” Ch 6. Revealing the Economic Value of Protecting the Great Lakes, Northest – Midwest Institute and National Oceanic and Atmospheric Adm, 2001, pp. 69-99.

-         Hitzhusen, Ayalasomayajula and Lowder, “Benefit Capture: Evidence from a River Corridor BCA” Selected Paper, AAEA mtgs, Chicago, IL Aug 6, 2001.

       Other Readings:

       -       Field Barry.  Environmental Economics, "Benefit-Cost Analysis, pp. 133-177, 1994.

       -       Dixon et al.  Economic Analysis of Environmental Impacts, Chaps 1-9, pp.3-115.

       -       Mishan, E.J.  Cost-Benefit Analysis, 1988, pp. 22-110, 159-294, 305-364, 116-153, and 375-414.

       -       Hitzhusen, F.J., "The Economics of Sustainable Agriculture: Adding a Downstream Perspective," Journal of Sustainable Agricul­ture, Vol. 2(2), 1991.

-         Barbier, Markandya and Pearce, "Sustainable­ Agricultural Develop­ment and Project Appraisal," Eur. R. Agri. Econ. 17(1990)181-196.

-         Brookshire, David and Helen Neill, “Benefit Transfers: Conceptual and Empirical Issues” Water Resources Research Vol. 28, No 3, March 1992, pp 651-55.

-         Hitzhusen, Magregor and Southgate, “Private and Social Benefit Cost Perspectives and a Case Application of on Reservoir Sedimentation Management,” Water Intl 9 (1984), 181-84.

3.    Applications of BCA (Critique topics, highlighted in lectures)

A.         Agricultural and Infrastructure Development

-     French, Dustin and F.J. Hitzhusen – “Toward Improved Codification, Protocol and Application of Benefit Transfer” proceedings of Southern Econ Assoc. Annual meeting, Washington, D.C., Dec, 2000.

-         Nicholas, M. and D. Pearce, “Cost-Benefit Analysis and Land Reclamation: A Case Study”, LEEC Paper 89-02.

               -       Palmquist, Raymond and Leon Danielson, "A Hedonic Study of the Effects of Erosion Control and Drainage on Farmland Values, Amer. J. of Ag Econ., Feb. 1989, pp.55-62.

               -       Shakya, Bibhaker and Fred Hitzhusen, "A Benefit-Cost Analysis of the Conservation Reserve Program: Are Trees Part of a Sustainable Future in the Midwest?", Journal of Regional Analysis and Policy, Vol. 27, No. 2, 1997, pp.13-29.

               -       “Cost and Benefits of Acquiring the Harq Water Entitlement,” Central Arizona Project, US Acctg Office, May 1995.

               -       Hitzhusen, F.J. and Mohammed Abdallah, "Economics of Electrical Energy from Crop Residue Combustion with High Sulfur Coal," AJAE August 1980, pp. 416-425.

               -       Forster et al., "Soil Erosion and Water Treatment Costs," JSWC, Sept/Oct, 1987, pp. 349-52.

               -       Hitzhusen and Nyamaah, "A Circuity Cost Model for Rehabilitation/  Closure of Rural Bridges," NCJAE, 1985, pp. 41-49.

               -       Karmokolias, Yannis, “Cost Benefit Analysis of Private Sector Environmental Investments: Case Study of the Kunda Cement Factory,”  Disc. Paper 30, Intl Fin., Corp; WB., Washington DC 1996.

       -       Hitzhusen, F.J.  "Social Costs and Benefits of Recycling Coal Fired Electric

PowerPlant FGD By-Products," AERS Dept., 1992.

       B.     Natural Resources and Environment Including Human Health Impacts

-         Macgregor, Hitzhusen and Maxwell, "Targeting Erosion Control with Off-Site Damage Estimates: The Case of Recreational Boating," Jour of Soil and Water Conser, 1991.

-         Thunberg and Shabman, "Willingness to Pay for Residential Flood Hazard Reduction Benefits: An Experiment Using CV Survey Methods," VPI, Blacksburg, VA  1988.

-         Hitzhusen and Luttner, "Benefit Cost Analysis of a Nonmetropolitan Prototype for Solid Waste Resource Recovery," AJAE, 1977, 691-98.

-         Mullen and Menz, "The Effect of Acidification Damages on the Economic Value of the Adirondack Fishery to New York Anglers," AJAE, February, 1985, pp. 112-119.

-         Arntzen, Jaap, “Economic Valuation of Communal Rangelands in Botswana: Case Study,” Working Paper 17, Univ of Botswana, February 1998

-         Johnson, Sam, "Physical and Economic Impacts of Sedimentation on Fishing Activities: Nam Pong Basin, Northeast, Thailand," 1984.

-         Brent, Robert J., "Health Evaluations Including U.S. Medicare and Physicians Services," pp. 12-19, and 96-102 in Applied Cost-Bene­fit Analysis, Edward Elgar, Brookfield, U.S., 1996.

-         Clarke, Philip, “Cost-Benefit Analysis and Mammographic Screening: A Travel Cost Approach,” Jour of Health Econ. 17 (1998) 767-787.

-         Eskeland, Gunnar, "Air Pollution Requires Multi-Pollutant Analy­sis: The Case of Santiago, Chile," Policy Research Dept., World Bank, June 1997.

-         Ortmeier, Brian et al. “A Cost-Benefit Analysis of Four Hormonal Contraceptive Methods” Clinical Therapeutics, Vol 16. No 4, pp 707-713.

-         Salkeuer, David, “Updated Estimates of Earnings Benefits from Reduced Exposure of Children to Environmental Lead,” Environmental Research 70 (1995) 1-6.

-         Hufschmidt et al., "Cases on Pulp and Paper, Forestry and Coal Electric Production," pp. 84-113.

-         Hitzhusen, F.J., Sarah Lowder and Radha Ayalasomayajula, “Muskingum River Economic Valuation: Phase II Working Paper”, AEDE Dept, OSU, Summer 2000.

-         Hanley and Spash, Chapters 10, 11, 12, and 13.

-         Sohngen et al Ch 7 “Case Studies,” Revealing the Economic Value of Protecting the Great Lakes, NE-Midwest Institute, NOAA, 2001, pp. 101-142.

4.    Oral Team Case Applications/Reports (1 week)

       Final Exam