SPRING 2001

This information effective for Spring 2001.
Check with instructor the first day of class for any changes.

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Economics

[ECON-153] [ECON-175]

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153. Cost Benefit Analysis

Spring 2001
Instructor: R. Grieson
Office: Soc Sci I, Room 237

Goal: To develop a theoretical and applied understanding of the tools and issues of cost-benefit analysis. The goal is not to learn how to prove theoretical propositions but, instead, to develop a thorough understanding on the underlying economic analyses and theories and the intuitive meaning and application of them. The goals are to learn and understand the microeconomics and methodology involved so that they may be manipulated and applied. Econ 100A is an absolutely necessary prerequisite. Econ 151 Public Finance: Taxation is very strongly recommended prior to this course.

Requirements: An exam, a paper on a cost-benefit study as described below, and perhaps a presentation of the paper in class, and a final. This is a difficult, rigorous theoretical course.

The Paper: An evaluation of a cost-benefit analysis. It may be one of the cost-benefit analyses listed herein, but not gone over in class, or one of the World Bank studies in the library. One ought to choose a benefit-cost analysis to study that is thorough, clear, concise, and makes clear what is done. It ought to be one that brings out theoretical, analytic, methodological, and practical issues without being so complicated or graphically detailed that the above are obscured. Your paper should do the above and be clear, concise, and well presented. Indicate the strengths and weaknesses of the study and alternative methods. Attach a copy of the B/C under study to your paper. A three-page summary of the B/C that you will study and your analysis of it is due for comments, approval, etc., before the fourth week of class.

Course Materials: On reserve at McHenry Library.

Required Text: A Guide to Benefit-Cost Analysis of Government Programs, 2nd ed., E. M. Gramlich, Waveland Press, 1998. Not everything in the books or readings will be covered in class or in the course. They may, however, be relevant to the project that you do your paper and presentation on or in your future.

Outline

* = Relatively more important

1. Introduction

*Cost-Benefit Analysis Debate in Regulation, American Enterprise Institute, January/February and March/April 1981.

*Gramlich, Chapters 1, 2, 3, and 13.

2. Measures of Welfare Change

*Gramlich, Appendix and Chapter 4.

R. H. Haneman and B. A. Weisbrod, "The Concept of Benefits in Cost-Benefit Analysis with Emphasis on Water Pollution Control Activities," in Peskin and Seskin, (eds.), Cost-Benefit Analysis and Water Pollution Policy, Urban Institute, 1975.

*E. J. Mishan, Cost-Benefit Analysis, Praeger, 1976, pp. 1-80.

*R. Willig, "Consumer's Surplus Without Apology," American Economic Review, 66, September, 1976.

*A. C. Harberger, "Three Basic Postulates for Welfare Economics," Journal of Economic Literature, Vol. 9.

*Gramlich, Chapters 2 and 3.

3. Opportunity Cost and Shadow Pricing of Market Items

*Gramlich, Chapters 5, 8, and 9.

*A. K. Sen, "Feasibility Constraints: Foreign Exchange and Shadow Wages," in R. Layard, (ed.), Cost-Benefit Analysis, Penguin, 1972.

*I. M. D. Little and J. A. Mirrlees, "The Use of World Prices," in Layard, ibid.

P. Dasgupta, "The Social Value of Investment and the Shadow Wage Rate," in Social and Economic Dimensions of Project Evaluation, Inter-American Development Bank, H. Schwartz and R. Berney (ed.), 1977, pp. 282-292.

*J. E. Stiglitz, "Some Further Remarks on Cost-Benefit Analysis," in H. Schwartz and R. Berney, Social and Economic Dimensions of Project Evaluation, Inter-American Development Bank (IADB), 1977.

Other

R. N. McKean, Efficiency in Government Through Systems Analysis, Wiley, 1958, Chapters 4, 8, and 9.

*R. N. McKean, "The Use of Shadow Prices," in S. B. Chase, (ed.), Problems in Public Expenditure Analysis, Brookings, 1968.

A. C. Harberger, Project Evaluation, University of Chicago Press, 1972.

4. Valuation of Non-Market Items and Externalities

*Layard, op. cit., pp. 23-29.

*A. J. Harrison and D. A. Quarmby, "The Value of Time," in Layard, op. cit.

*N. W. Mansfield, "The Value of Recreational Facilities," in Layard, ibid.

R. E. Grieson and J. White, "The Measurement and Capitalization of Externalities: A Reassessment" (forthcoming), Journal of Urban Economics, 1989.

*Gramlich, Chapters 5, 8, 9, 10, and 12.

5. The Discount Rate Issue

*Gramlich, Chapter 6.

*Layard, ibid., pp. 29-37.

M. Feldstien, "The Social Time Preference Discount Rate...," Economic Journal, Vol. 74, 1964.

*A. K. Sen, "The Social Time Preference Rate...," in Layard, op. cit.

*M. S. Feldstein, "The Inadequacy of Weighted Discount Rates," in Layard, ibid.

*A. C. Harberger, "The Opportunity Costs of Public Investments Financed by Borrowing," in Layard, ibid.

*R. E. Grieson, "On Optimal Levels of Taxation, Borrowing, and Government Expenditure," National Tax Journal, Vol. 28, June 1975.

6. Other Issues

A. Risk

*Gramlich, Chapter 6.

*R. Dorfman, "Decision Rules Under Uncertainty," in Layard, ibid.

B. Distribution

*Gramlich, Chapter 7.

*A. C. Harberger, "On the Use of Distributional Weights in...B. C.," Journal of Political Economics, April 1978.

*B. A. Weisbrod, "Deriving an Implicit Set of Governmental Weights for Income Classes," in Layard, op. cit.

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175. Energy Economics

Spring 2001
Instructor: R. Grieson
Office: Soc Sci I, Rm. 237

Requirements:

Midterm and final examinations (see end of list)

Course Outline and Reading List

I. Pricing and use of energy resource without exhaustibility

A. Price controls

1. Oil

2. Natural gas

MacAvoy, P. W. and R. S. Pindyck. The Economics of the Natural Gas Shortage (1960-1980), Amsterdam: North-Holland, 1975.

Neri, J. A. "An Evaluation of Two Alternative Supply Models of Natural Gas," Bell Journals, 8, Spring 1977, 284-303.

B. Use of monopsony power and price rent taxes for oil and natural gas (in practice, windfall profits taxes). Short and long run.

C. Optimal export and import policies for small and large countries, given balance of payments, etc., problems

Jausman, J. A., "Project Independence Report: An Appraisal of U.S. Energy Needs up to 1985," Bell Journal of Economics, 6, Autumn 1975, 517-551.

Houthakker, H., "Can the U.S. Be Independent in Energy," Public Utilities Fortnightly, Sept. 1974.

D. Allocation during a crisis--rationing, taxes, auctions, etc.

E. Interaction or substitution effects of pricing natural gas, oil, etc.

F. Second best tax subsidy policies

G. Effects of OPEC on oil prices since 1973 and predicted effects to 1990

Hudson, E. and D. W. Jorgenson, "U.S. Energy Policy and Economic Growth 1975-2000," Bell Journal, 5, Autumn 1974.

II. Pricing of secondary energy: electric, natural gas, etc.

A. Long-run economics of scale

B. Peak load or time of day considerations

C. Interregional equalization

D. The California system (refer to I,F)

III. Oil and natural gas

A. Optimal exploration and discounting

Hanson, D. A., "Exhaustible Resources; Second Best Pricing Policies for an Exhaustible Resource," Proceedings: American Economic Review, 67, Feb. 1977, 351-354.

Herfindahl, O. C., "Depletion and Economic Theory," in M. Gaggney, ed., Extractive Resources and Taxation, Madison, 1967.

Hotelling, H., "The Economics of Exhaustible Resources," Journal of Political Economy, 39, April 1931, 137-175.

Solow, R. M., "The Economics of Resources or the Resources of Economics: Richard T. Ely Lecture," Proceedings, American Economic Review, 64, May 1974, 1-14.

Nordhaus, W. D., "The Allocation of Energy Resources," Brookings Papers, 3, 1973, 529-576.

Optional theoretical work:

Shell, A. and J. E. Stiglitz, "The Allocation of Investment in a Dynamic Economy," Quarterly Journal of Economics, Nov. 1967, 81.

Stiglitz, J., "The Efficiency of Market Prices in Long-Run Allocations in the Oil Industry," in G. Bronnon, ed., Studies in Energy Tax Policy, Cambridge, Mass., 1975.

B. Nature of a depletable resource

C. Effects of and optimal taxation of depletable resources

Agria, S. "Special Tax Treatment of Mineral Industries," in A. Harberger and M. Bailey, eds., The Taxation of Income From Capital, Brookings Inst., Washington, 1979.

D. What is the long-run supply of depletable natural resources, and will we run out?

E. Second best optimization reconsidered

IV. Items of class interest, T.B.A.

Most of the material in the course will be from class lectures. Readings are put in as a supplement where available. Much analysis concerning energy is not yet available in readable published form. It is either too mathematical, theoretical, or, two (2) pages of useful general analysis are buried in a 200-page report.