Professor Fred Thompson
The subject of this course is cost-benefit analysis in the public sector. Underlying such analysis is the view that anything important can be measured, that projects with positive net present value increase social welfare, and that the government represents all sectors of a community. Students learn to analyze social costs and benefits of government actions, and why such analysis is important also in the private sector. In addition, students consider the interaction of various government programs, and the effect of government projects and activities on employment, distribution of income, and other policy goals. The course helps prepare students for careers as budget and program analysts, project managers, and consultants, and in sales.
The course is organized around five components:
1. The importance of measurement
2. Public choice and public welfare
3. Valuation of public projects, ex ante and ex post
4. Effective communication of quantitative results
Regular class preparation, attendance, and participation are required.
Course materials: Textbook, cases, articles, lecture notes.
Prerequisites: GSM-510 Economics, Finance, and Markets, or with the permission of the instructor,
The goals of the course include:
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 (unless the project will be even more valuable if delayed). 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.
My office hours are T/TH 9:30 AM to 12 noon. Or call for an appointment (370-6228). My e-mail is firstname.lastname@example.org. My website is at: http://www.willamette.edu/~fthompso/. I encourage you to give me feedback on how the course is progressing.
Texts: Douglas W. Hubbard  How to Measure Anything (second edition New York: Wiley), Edward M. Gramlich  A Guide to Benefit-Cost Analysis (Prospect Hights IL: Waveland Press, Inc.), and Ron Howard, "The Decision to Seed Hurricanes"
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 Project 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: 35 percent; Downtown Parking Garage: 25 percent; Project 15 percent; Project Presentation: 10 percent, Midterm 15 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 Downtown Parking Garage, you would upload it as DPG.doc. to the appropriate folder. ClassTools will automatically identify the sender and log the date and time of submission.
GeneralHow to Measure Anything
Society for Benefit-Cost Analysis
Journal of Benefit Cost Analysis
How Do You Value a Life: Economists do it with Models
Sources for Valuing Human Life
Health Data and ModelsMortality
The EnvironmentCost Benefit News
Resources for the Future
Fish & Wildlife
General Governement and MilitaryGAO Home Page
Army Cost and Economic Analysis Center
January 18 Introduction. For class on Janury 20, answer the following questions: How many people live in Detroit, OR? How mny piano tuners are there in Salem? Be prepared to explain your sources and your methods? Please do not share this information wih your classmates before class.
January 20 Introduction (cont.) Read H Section 1 (1-44) G chapters 1-2 (1-28). Do Fermi Problems in class.
January 25 Read H Section 2 (45-116)
January 27 Read H Section 3 (117-200). A real example.
February 1 Read H Section 4 (201-288)
February 3 Read Howard et al "The Decision to Seed Hurricanes"
February 8 Read G chapter 6 pp. 92-101 Problem set 1 (probs 1-5) due February 13, midnight (G p. 111)
February 10 Solow Model
February 15 Read G chapter 6 pp. 102-110, 113-4 (this is new stuff, you should know about it, but you probably won't be using it)
February 17 Initial Review
February 22 Initial review (cont.), if there is time, we'll look at Downtown Parking Garage. Background.
February 24 Term-Project PROPOSALS due. Read G chapter 8, pp. 134-143. Do Real options. Read environmental economics problem set 2 due February 27 (G p. 149).
March 1 Read G chapter 8, pp. 143-148.
March 3 Read G chapter 12 and Death.
March 8 CEA analysis continued; please read Plug values also Plug values considered.
March 10 (Downtown Parking Garage draft spreadsheets due noon March 11.)
March 15 Downtown Parking Garage presentations. Discuss,
March 17 Downtown Parking Garage presentations.
March 29 Costs. Read G Chapter 3. Downtown Parking Garage final report and spreadsheets due. Complete exercises on handout for class March 31, note that the formula in the notes should read (P-MC)/P=1/E (see answers). Problem set 3 due April 3 (G p. 45, questions 1 [part 3 of 1e is extra credit], 2, & 3)
March 31 Read G chapter 4 (pp. 48-64). Do problem set 4 G pp. 77-8, questions 4, 5, & 6, April 10.
April 5 Read G chapter 4 (pp. 65-77).
April 7 Midterm (see below)
April 12 Read G chapters 7 and 9, problem set 5 due April 15 (G p. 132).
April 21 Project Draft due.
April 26 Read Plug values
April 28 Read G chapter 13. Projest deadline April 31.
May 3 Project Presentations
Topic: "Improve the capabilities of public health agencies to plan for and respond to the public health and safety risks of wildfire emergencies." Amy Vukovich, James Stevenson, and Matt Ochs
Topic: "Improve capacity to provide technical assistance and incentives to increase storage and to improve conservation, reuse, and water use efficiency among all consumptive water uses." Tim Miller, Brett Hatton, and Regina Safina
May 5 Project Presentations
Topic: "Improve the capabilities of public health agencies to plan for and respond to the public health and safety risks of wildfire emergencies." Narusan Dhanvarjor, John Herbert, Victor Rattanavong
Topic: "Enhance and sustain public health system capacity to prepare for and respond to heat waves and smoke emergencies and improve delivery of information on heat events and cooling centers, especially for isolated and vulnerable populations." Kyle Hardy, Will Norris, and Katy Washington
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.
A. 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