1. A2 Economics Mr. Durham durham.j@shishialevel.cn

2. Lesson Objectives Review: MC Questions handed out Friday HW
To review the term deadweight loss, both by definition and illustration
In the News: Generate class discussion on externalities
Introduce Cost Benefit Analysis – Apply to Olympics

3. Review Question
Question: Using an appropriate diagram, explain how positive externalities are a type of market failure. Group Activity: Ten minutes to develop answer and illustration. One team member will be asked to present.

4. Review Activity Class: Anything missing you would suggest adding?
2 Key Definitions to know
Positive Externalities
Market Failure

5. Review Activity
Positive Externalities: exist when the marginal benefit of production and or consumption exceeds the marginal private benefit. Positive effects spillover to third parties free of charge. The result is under production or under consumption Market Failure: occurs when freely functioning markets, operating without government intervention fail to deliver an efficient or optimal allocation of resources

6. Review Activity – 2 Diagrams

7. Video
Introduction to Deadweight Loss: Question: What is the difference between the situation described in this video, and the situation in the case of a market failure, say from an externality?

8. MC HW - Review
* Compare answers to classmate. Will go through answers after break

9. Cost Benefit Analysis
Question: Should the government fund a new ice hocket and football arena in my home city?

10. Cost Benefit Analysis CBA
CBA is a technique for assessing the (monetary) social costs and benefits of an investment project or a Government Spending Decision over a given time period
It was developed by public sector economists in order to identify and quantify the social costs and benefits of public sector investment projects
L/O:

11. COST-BENEFIT ANALYSIS
Private costs (Cost to the firm) + External costs
= Social costs
Private benefits (Gains to the firm) + External benefits
= Social benefits

12. Does the decision lead to an increase in social welfare?
Basic CBA Process
Does the decision lead to an increase in social welfare?
M1 Motorway 1961
Euro Tunnel
1987
Speed Cameras
1997
L/O:

13. 4 STAGES IN COST-BENEFIT ANALYSIS
Identify all relevant costs and benefits
Put a monetary value on all relevant costs and benefits
Forecast future costs and benefits (where appropriate) – discount cash flows to present value
Decision-making

14. What price would you put on ..
A nice view?
A work of art?
An easy commute to work?
Time saved?
L/O:

15. 5. Consider the Constraints
The aim of CBA is to maximise social net benefit, however it is important to recognise that there are likely to be various constraints:
Technological
Legal
Administrative
Distributional
Political
Budgetary
Ethical

17. Conclusion
Used properly CBA can be used to address market failure and improve social efficiency. However they are likely to have many opponents and likely to be hijacked by private interests!
Example: Political Interests or Private Interests (wealthy individuals) could exert pressure, and the costs or benefits may be measured in their favour

18. ESSAYS
(a) Explain what is meant by a negative externality. Use examples to explain (12)
(b) Discuss the extent to which an indirect tax alone can rectify the problem of market failure due to negative externalities. (13)

19. ESSAYS
(a) Using examples, explain why cost- benefit analysis is central to the decision making process in the allocation of public goods. (12)
(b) Discuss some of the limitations of cost- benefit analysis in the allocation of public goods. (13)

20. Homework
HW: Groups will present their Cost Benefit Analysis for their project.
Maximum 6 Minutes
Present Wednesday
Can bring a PPT, Video, etc on USB stick
Some class time on Tuesday to
prepare

21. Homework - Topics CBA analysis of
A new international airport in Chiang Mai Thailand
A new stadium for the Calgary Flames NHL hockey team
Building a bullet train from Chengdu to Shenzhen
Hosting the Winter Olympics in Beijing
Constructing a museum of modern art
In Chengdu