1. CF of non-traded project OUTPUTS Krishna R Khadka
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2. 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:
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3. 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
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4. If sold in the market
Consumers surplus
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5. National economic parameters
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6. 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)
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7. Cont… National economic parameters are used by all projects
The price of these parameters are estimated on the basis of the national economic objectives
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8. 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
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9. 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
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10. 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
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11. CF for Land Two alternatives sources of land:
If unused barren land is used
If land is drawn from other uses
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12. Transfer of payment
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13. Economic appraisal techniques
Economic net present value
n n
 EBt/(1 + d)t -  ECt/(1 + d)t
t= t=0
Economic benefit cost ratio
n n
 EBt/(1 + d)t /  ECt/(1 + d)t
t= t=0
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14. 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.
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15. 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
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16. 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
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17. 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 ?
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