CF of non-traded project OUTPUTS Krishna R Khadka Krishna Khadka

CF of non-traded project OUTPUTS For the estimation of economic prices or CF of the traded project output we follow the same method and equations as explained above (estimation of CF of traded inputs) However some project outputs especially the output of public projects such as the drinking water projects or transportation projects or hospital project or education projects are either freely distributed or are highly subsidized If they are freely distributed there will be no return series/benefit series. If they are subsidized the benefit series will not show the real value of the output/services. Some of the commonly used approaches for the estimation of economic value of the above products/services are: Krishna Khadka

CF of non-traded project OUTPUTS Classification of non-traded project output Sold in the domestic market Not sold in the market: free distribution If sold in the market  Consumers’ surplus  Willingness to buy  Replaced supply  Additional supply Krishna Khadka

If sold in the market Consumers surplus Krishna Khadka 4

National economic parameters Krishna Khadka

National economic parameters Land, labour, capital, standard conversion factors, discount rate and foreign exchange rate are known as national economic parameters. The economic price of the above parameters are also known as policy prices (parameters) Krishna Khadka

Cont… National economic parameters are used by all projects The price of these parameters are estimated on the basis of the national economic objectives Krishna Khadka

CF of labour However some times we have to estimate the shadow price or CF for labour and land for the economic analysis of the project If we have to estimate the shadow price of labour we must find out whether the supply of labour exceeds the demand for labour or Demand for labour exceeds the supply Krishna Khadka

CF of labour If supply exceeds the demand for labour The opportunity cost of the labour to the project will be the benefit foregone by the economy expressed at economic prices while transferring labour to the proposed project Krishna Khadka

CF of labour Third alternative In the third case the economic cost of labour is equal to the market wage plus training cost expressed at economic prices Krishna Khadka

CF for Land Two alternatives sources of land: If unused barren land is used If land is drawn from other uses Krishna Khadka

Transfer of payment Krishna Khadka

Economic appraisal techniques Economic net present value n n  EBt/(1 + d)t -  ECt/(1 + d)t t=0 t=0 Economic benefit cost ratio n n  EBt/(1 + d)t /  ECt/(1 + d)t t=0 t=0 Krishna Khadka

Decision rule (ENPV) If ENPV is positive the project is economically acceptable – it makes positive contribution to the national economy If ENPV is negative the project does not contribute to the national economy so it should be rejected If ENPV is zero the project has no effect to the economy. Krishna Khadka

Domestic resource cost coefficient Domestic resource cost coefficient (DRC) is one of the variants of the cost benefit technique and shows the domestic resource (expressed at economic efficiency prices) needed to earn or to save one unit of foreign exchange Krishna Khadka 15

Domestic resource cost coefficient cont… This method is used for the estimation of efficiency of the project in a particular year – estimation of annual cost benefit assessment of the project Following equation shows the DRC of a project Krishna Khadka 16

EXERCISE Please give your comments on the following possibilities Project FNPV ENPV Decision I Positive positive ? II positive negative ? III negative positive ? IV negative negative ? Krishna Khadka 17