CHAPTER 8: COST-BENEFIT ANALYSIS

Hicks-Kaldor Criterion

A project should be undertaken if it has a positive net present value, regardless of the distributional consequences.

Cost-Benefit Analysis

A set of procedures based on welfare economics for guiding public expenditure decisions.

Real Amounts

Amounts of money adjusted for changes in the general price level.

Nominal Amounts

Amounts of money that are valued according to the price levels that exist in the years that the amounts are received.

Cost-Effectiveness Analysis

Comparing the costs of various alternatives that attain similar benefits to determine which one is the cheapest.

Present Value Criteria

Rules for evaluating projects stating that (1) only projects with positive net present value should be carried out; and (2) of two mutually exclusive projects, the preferred project is the one with the higher net present value.

Consumer Surplus

The amount by which consumers' willingness to pay for a commodity exceeds the sum they actually have to pay.

Internal Rate of Return

The discount rate that would make a project's net present value zero.

Discount Factor

The number by which an amount of future income must be divided to compute its present value. If the interest rate is r and the income is receivable T periods in the future, the discount factor is (1+r)^T

Social Rate of Discount

The rate at which society is willing to trade off present consumption for future consumption.

Discount Rate

The rate of interest used to compute present value

Benefit-Cost Ratio

The ratio of the present value of a stream of benefits to the present value of a stream of cots for a project.

Shadow Price

The underlying social marginal cost of a good.

Certainty Equivalent

The value of an uncertain project measured in terms of how much certain income an individual would be willing to give up for the set of uncertain outcomes generated by the project.

Present Value

The value today of a given amount of money to be paid or received in the future.