THE UNIVERSITY OF MICHIGAN
School of Public Policy
and
Department of Economics

SPP/ECON 573
BENEFIT-COST ANALYSIS

SYLLABUS
Winter 2000, Alan Deardorff

Text Requirements Weights Schedule Contacts Readings

PURPOSE: The aim of this course is to teach you how to do benefit-cost analysis. On one level, this is pretty simple: just sum all the benefits of a program, subtract all the costs, and there you are. If net benefits are positive, the program is a winner; i f not, not. In choosing among programmatic options, take the one with the highest level of net benefits.

But obviously there are complications. First, it is not always easy to measure benefits and costs -- you have to know some economics and perhaps even some philosophy. Second, benefits and costs can occur at different times, and you have to adjust for that problem. Third, benefits and costs are received and borne by different people, and both the economics and the politics of dealing with distributional issues can get tricky. Fourth, there are many different types of programs for which an aspiring p ublic servant might want to do a benefit-cost analysis. This list goes on, and it will easily fill a semester for us to cover it adequately.

Prerequisite: SPP/Econ 555 or equivalent courses in microeconomics
Organization: The course meets twice a week, Mondays and Wednesdays, 8:30-10, in room B844 East Hall.

TEXT

    The textbook for the course is

      Gramlich, Edward M., A Guide to Benefit-Cost Analysis, Second Edition, Waveland Press, 1990, isbn #0-88133-988-1.

    There will also be a number of additional readings that will be available in a coursepack from Grade A Notes Copy Service, in Ulrich's Bookstore, 549 E. University. One copy of the coursepack will be on reserve in the Foster Library, but I expect that mo st of you will want to buy it.

REQUIREMENTS

Requirements for the course consist of a series of problem sets, two "case exercises," two in-class mid-term exams, and an optional final exam.

Problem sets will be handed out a week before they are due, and they should be done individually. You may discuss them with other members of the class, but the work you hand in should be your own. It is important that you show clearly how you get your answers, and not just the answers themselves, and they will be graded accordingly. Problems (and exams) will use tools that may have been presented only in class, as we will as tools from your previous course in microeconomics, so do not count on the textbook and other readings to tell you all you need in order to do them well.

The case exercises will be like elaborate problem sets, but each with only one large problem, applying benefit-cost to some hypothetical situation that will be spelled out in some detail. My plan is to hand out each one of them on Mondays, and have them due 48 hours later, at the beginning of following Wednesday class. If you see problems with that timing for the dates listed below, please let me know immediately.
For these case exercises, you will definitely work in groups, of two or perhaps three, that I will assign. That is, you don't get to pick your partners for these assignments. I will make the assignments by a week before the exercises are handed out, so that you and your partner(s) will have time to think about how you will coordinate. You will turn in only a single document for your group, and members of a group will share the same grade. The groups for the second case exercise will be different f rom those for the first.

All exams will be in class, closed-book. You should bring a calculator, although it will not be needed for most of the questions.

WEIGHTS

SCHEDULE

DateAssignment DateAssignment
Jan 26Problem Set #1Mar 15
Feb 2Problem Set #2Mar 22Problem Set #5
Feb 9Problem Set #3Mar 29Case Exercise #2
Feb 16Problem Set #4Apr 5Midterm Exam #2
Feb 23Case Exercise #1Apr 12(last class)
Mar 1(break)Apr 26Optional Final Exam
Mar 8Midterm Exam #110:30 AM - 12:30 PM

All of the problem sets, as well as the case exercises, are due at the beginning of class (8:40 AM) on the stated Wednesday. Late problem sets will be penalized by approximately one-third of a letter grade per 24-hour period beyond the deadline. Lat e case exercises will be penalized approximately one-third of a letter grade per 2 hour period beyond the deadline.

Please NOTE the date of the final exam, which is the LAST DAY of the examination period, April 26. If that is a problem for you, let me know immediately.

WHERE AND WHEN TO FIND US

EXTRAS
COURSE OUTLINE AND READING LIST

Note: My intention is to complete through I-C by mid-February, for use on the first Case Exercise, and to complete through II-A by mid-March for the second Case Exercise. The remaining topics will be addressed only as time permits, and they will be covered on exams only if I have reached them in lectures.

*****
I.Principles of Valuation
A.Introduction
Gramlich, Ch. 1, 2, 3
B.Partial Equilibrium
Gramlich, Ch. 4
Porter, Richard C., "Michigan's Experience with Mandatory Deposits on Beverage Containers," Land Economics, May 1983.
C.Timing and Discount Rates
Gramlich, Ch. 6
U.S. General Accounting Office, "Discount Rate Policy," May 1991
D.General Equilibrium
Gramlich, Ch. 5
Brown, Drusilla K, Alan V. Deardorff, and Robert M. Stern, "A North American Free Trade Agreement: Analytical Issues and a Computational Assessment," The World Economy, January 1992, pp. 11-29.
II.Issues and Complications
A.Distribution
Gramlich, Ch. 7
B.Human Investment
Gramlich, Ch. 9
Gramlich, "Evaluation of Education Projects: The Case of the Perry Preschool Program," Economics of Education Review, 1986.
C.International Considerations
Tarr, David G. and Morris E. Morkre, "Sugar," Chapter 4 in Aggregate Costs to the United States of Tariffs and Quotas on Imports, Federal Trade Commission, December 1984, pp. 75-100.
Deardorff, Alan V., "International Conflict and Coordination in Environmental Policies," in Jagdeep S. Bhandari and Alan O. Sykes, eds., Economic Dimensions in International Law: Comparative and Empirical Perspectives, New York: Cambridge University Press, 1997, pp. 248-274.
III.Other Perspectives
Aaron, H., "Public Policy, Values, and Consciousness," Journal of Economic Perspectives, Spring 1994.
Railton, "Benefit-Cost Analysis as a Source of Information about Welfare," in Hammond and Coppock, eds., Valuing Health Risks, Costs, and Benefits for Environmental Decision Making, National Academy Press, 1990.