MW 3:30-4:50 pm

Professor Fred Thompson

Office Hours: Tuesday and Thursday 10:30-12:30, or by appointment, ex: 6228, home phone: 503-508-4229,

The subject of this course is public cost-benefit analysis. It has three objectives:

This course reflects the view that, in the presence of a capital market where funds can be obtained at a price, the welfare of the citizenry will be maximized by the implementation of all projects offering positive net-present values. Unlike private sector cost-benefit analysis, however, government represents all the groups in a community, so the gains and losses of all these groups should be considered, not just those that accrue to stockholders. Moreover, government has an obligation to look at true social costs and benefits, not just market prices. Further, government decision makers might want to weigh benefits and costs differently if governmental activities or projects alter the distribution of income, the level of unemployment, or some other goal of policy.

Text: BGVH Tony Boardman, Dave Greenberg, Aidan Vining, and Dave Weimer Cost-Benefit Analysis: Concepts and Practice [2006 third edition], Upper Saddle River NJ: Pearson Prentice-Hall.

Grading: Project presentations will be evaluated in terms of clarity and effectiveness, plus accuracy. Class participation will be evaluated in terms of your demonstrated understanding of the issues and relevant capital budgeting concepts (cite text!), your ability to present a point of view and skill in persuading your peers to accept that perspective, and your ability to listen and react appropriately and productively to your classmates' contributions. Weights: Homework and class recitation: 40 percent; Downtown Parking Garage: 15 percent; Project 25 percent; Project: 20 percent.

Homework assignment should be submitted via ClassTools as eXcel documents. Open GSM-603: Hand Ins; upload assignment using the abbreviated title of the assignment and no spaces in the document title. For example, if you were turning in Gramlich, Chapter 3, Question 1 part a, you would upload it as G3a.doc. to the appropriate folder. ClassTools wiil automatically identify the sender and log the date and time of submission.

Key Links:

Cost Benefit News

Resources for the Future

GAO Home Page

Army Cost and Economic Analysis Center

Code of Federal Regulations

Course Schedule

January 17 Introduction

January 19 Read BGVW chapter 1

January 24 Read BGVW chapter 2 (complete exercises on handout, see answers )

January 26 Read BGVW chapter 3.

January 31 Read BGVW chapter 4

February 2 Read BGVW chapter 5

February 7 Read BGVW chapter 6

February 9 Read BGVW chapter 10

February 14 Read BGVW chapter 7

February 16 Read BGVW chapter 8

February 21 Read BGVW chapter 9

February 23 Midterm Exam

February 28 CLASS LAB Work on Downtown Parking Garage

March 2 CLASS LAB Work on Downtown Parking Garage

March 7 Downtown Parking Garage (due) SELECT TOPIC for TERM-PROJECT

March 9 Read BGVW chapter 11.

March 14 Read BGVW chapter 12

March 16 Read BGVW chapter 13 [329-339]



March 28 Read BGVW chapter 13 [339-357]

March 30 Read BGVW chapter 14

April 4 Read BGVW chapter 15 [391-404]

April 6 Read BGVW chapter 15 [404-416]

April 11 Read BGVW chapter 17

April 13 Read BGVW chapter 18

April 18 Read BGVW chapter 19

April 20-May 2 Project Presentations


Topics Covered:

A. Review -- when government should intervene in a market economy

1. Allocative inefficiency: public goods, externalities, natural monopoly
2. Distributive equity: direct tax and transfer programs, investment in human capital, social insurance

B. Principles of Cost-Benefit Analysis

1. Welfare economics -- Pareto
2. Microeconomics -- Hicks, Little
3. Public Choice -- Wicksell, Lindahl
4. Maximization of net benefit (missing information, cost-effectiveness analysis, con straints)

C. Valuation of Benefits and Costs

1. Consumer and Producer surplus and deadweight loss
2. Demand functions
3. Inferring costs where markets do not clear
4. Inferring costs where markets do not exist (loss of life, capital values, time-saving)

D. The Mechanics of Discounting

E. Capital Budgeting with Uncertainty

1. The state-preference approach (certainty equivalents, decision trees)
2. Prices with uncertainty, multi-period investments
3. Valuing flexibility: option-valuation techniques

F. The Gains and Losses to Different Groups

1. The leaky bucket
2. Distributional weights
3. Risk aversion

G. Applications

1. Operating investments (modernizing plant and equipment, substituting one program for another, make vs. buy analysis)
2. Physical investment and the environment
3. Human investment
4. Intergovernmental grants
5. Tax expenditures
6. Social regulation

H. The politics of Cost-Benefit Analysis


Any student eligible for and desiring academic accomodations due to a disability is requested to provide documentation to Disability Services located in the Bishop Wellness Center within the first two weeks of the semester.