1. AGEC 608 Lecture 19, p. 1 AGEC 608: Lecture 19 Objective: Quick evaluation of the accuracy of CBA Readings: –Boardman, Chapter 19 Final exam: Monday, May 5 10:20am - 12:20pm Kran G-1

2. AGEC 608 Lecture 19, p. 2 How to assess accuracy Recall the three basic approaches to assessing accuracy: 1. Ex ante CBA (prior to project) 2. Ex post CBA (after the project) 3. In media res (during the project) Other things equal, studies done later are usually more accurate because uncertainty has been resolved. But accuracy depends on how well the CBA was done.

3. AGEC 608 Lecture 19, p. 3 Sources of errors in CBA Most error arises from: 1.Omission errors 2.Forecast errors 3.Valuation errors 4.Measurement errors

4. AGEC 608 Lecture 19, p. 4 1. Omission errors Omission errors tend to occur for one of two reasons: 1. Exclusion of an impact category due to the low probability of occurrence, highly technical nature of the project, or scientific disagreement over the physical impacts. 2. Double counting, usually from counting effects in both primary and secondary markets.

5. AGEC 608 Lecture 19, p. 5 2. Forecast errors Forecasting errors are common, and arise due to: 1. Difficulty of forecasting complex projects, projects with long time horizons, and projects with uncertain causes and effects. 2. Cognitive biases. People tend to underweight low probability “bad” events and overweight low probability “good” events. 3. Projects often get modified upon implementation.

6. AGEC 608 Lecture 19, p. 6 3. Measurement errors The extent of error depends on the accounting methods used.

7. AGEC 608 Lecture 19, p. 7 4. Valuation errors It is extremely difficult to obtain monetary measures of the social value of some impacts. Unanticipated changes in relative prices can have an impact on project valuations (especially the costs of very large infrastructure projects).

8. AGEC 608 Lecture 19, p. 8 Distribution of net benefit over time Think of expected net benefit as having a probability density, defined by the function: F(NB, μ, σ), where μ = mean, σ = variance It is generally the case that as time passes, μ gets closer to NB and σ decreases.

9. AGEC 608 Lecture 19, p. 9 Effect of time on CBA errors 1. Omission errors – decline over time 2. Forecasting errors – decrease as impacts occur 3. Measurement errors – not affected by time 4. Valuation errors – decrease over time