Applied Welfare Economics

Massimo Florio is Professor of Public Economics and Jean Monnet Chair “ad personam” of EU Industrial Policy at the University of Milan, Italy.Chiara Pancotti is Adjunct Professor of Cost-Benefit Analysis at Università degli Studi di Milano and Senior Researcher at the Centre for Industrial Studies, Italy.

• Chapter 1: On Social Welfare Overview1.1. The concept of social welfare*1.1.1 Gross Domestic Product as welfare measurement1.1.2 Income and final consumption1.1.3 A digression on money in welfare economics1.2. The welfare assumptions behind GDP and NNP1.3. Individual and social welfare1.4. Determinants of individual welfare: goods1.5. Determinants of social welfare: individual utilities1.5.1 Aggregating individual utilities1.5.2 Interpretation of welfare weights1.6. Sen’s critique of individualistic Social Welfare Function1.7. Paternalism and not (only) individualistic Social Welfare Functions1.8. Happiness economics1.9. ‘Positive’ analysis1.10. Further reading1.11. Summary of Chapter 1Chapter 2: The two Fundamental Theorems re-examinedOverview2.1. Theorems versus Intuitions2.2. The Arrow-Debreu (AD) Economy (*)2.3. The axiomatic structure (*)2.4. Consumers, producers and government: objectives and constraints (*)2.5. The Walrasian equilibrium2.6. The two Theorems without ideology2.7. The informative structure: Stiglitz’s critique2.8. Critical analysis of the Second Theorem2.9. The government rediscovered in second-best economies2.10. Further reading2.11. Summary of Chapter 2Appendix A2.1 – Policies based on the Second Theorem: lump-sum transfersAppendix A3.1: Some results from Drèze and Stern (1987) Marginal social value of producer pricesMarginal social value of commodity taxesMarginal social value of a production constraint Chapter 3: Shadow prices and the social plannerOverview3.1. Introductory remarks3.2. A model for project and policy evaluation3.3. A second best economy in the DS frame3.4. Policy reforms and shadow prices3.5. Multi-government setting3.6. Why using shadow prices? 3.7. Further reading3.8. Summary of Chapter 3Chapter 4: The social cost of goodsOverview4.1. Observed prices and financial analysis4.2. Accounting prices and economic analysis4.2.1 Conversion of market prices to shadow prices4.2.2 Extension of project boundaries: externalities and indirect effects4.2.3 Assessing the economic performance4.3. Empirical approaches for guessing accounting prices4.4. The border price rule for tradable goods4.5. The Standard Conversion Factor4.6. The long run marginal cost4.7. Willingness-to-pay4.7.1 Definition and scope of application4.7.2 Stated preferences approaches4.7.3 Revealed preferences approaches4.7.4 Benefit transfer approach4.8. Further readings4.9. Summary of Chapter 4Appendix A4.1: Financial analysisThe financial return on investmentThe financial return on capitalFinancial performance indicatorsFinancial sustainabilityDealing with taxes in the financial analysisAppendix A4.2: An example of financial and economic analysisChapter 5: The social cost of labourOverview5.1. Earlier literature on the social opportunity cost of labour5.1.1 Theoretical contributions5.1.2 Empirical contributions5.2. A conceptual model for the social cost of labour5.3. The shadow wage rate and labour market conditions5.3.1 Simplifying the Little-Mirrlees formula for the SWR5.3.2 Empirical formulae5.4. Empirical estimation of shadow prices for EU regions5.4.1 Data and methods5.4.2 Estimation of the SWRs5.5. Further reading5.6. Summary of Chapter 5Chapter 6: The social cost of capitalOverview6.1. Rationale for discounting6.2. Estimating the social discount rate6.2.1 The social rate of return on private investments (SRRI) 6.2.2 The social rate of time preference (SRTP) 6.2.3 The weighted average method6.2.4 The shadow price of capital6.3. The social discount rate as a function of time6.4. Empirical estimates of the social discount rate6.4.1 International evidence: SDRs recommended in selected countries6.4.2 An example of SRTP estimation6.5. The opportunity cost of public funds6.6. Further reading6.7. Summary of Chapter 6Chapter 7: Welfare weights and distributional impactsOverview7.1. Why are equity considerations needed in CBA? 7.2. Deriving welfare weights7.3. Estimation of distributional weights7.4. The distributional characteristic of goods7.5. Group and regional welfare weights7.6. Basic needs and social affordability7.6.1 The basic needs approach7.6.2 Social affordability analysis7.7. Further reading7.8. Summary of Chapter 7Chapter 8: Risk assessmentOverview8.1. Rationale of the risk assessment8.2. Definitions and concepts8.3. Historical background: the World Bank model8.4. Sensitivity analysis8.4.1 Identification of the critical variables8.4.2 Approaches to test the sensitivity of the CBA model8.5. Probability analysis8.5.1 Probability distributions of the critical variables8.5.2 Dealing with correlations between the critical variables8.6. Risk Analysis8.6.1 Monte Carlo simulations8.6.2 Evaluation of the investment’s riskiness8.7. Further reading8.8. Summary of Chapter 8Appendix A8.1: Distributions of probabilitiesAppendix A8.2: Monte Carlo methodTheoretical framework of the Monte Carlo methodChoice of the number of simulationsAppendix A8.3: Generating correlated random numbersModeling dependence through conditional distributionsModeling dependence through copulasChapter 9: International evaluation practicesOverview9.1. National traditions and operative guidelines9.1.1 United Kingdom9.1.2 France9.1.3 United States of America9.2. The use of cost—benefit analysis in the EC regional policy9.3. Multilateral development banks9.3.1 The European Investment Bank9.3.2 The World Bank9.4. Further reading9.5. Summary of Chapter 9Chapter 10: Ex-post project evaluation Overview10.1. Timing and scope of CBA 10.2. Performing ex-post CBA 10.2.1 Project border identification10.2.2 Reference scenario10.2.3 Demand analysis10.2.4 Willingness-to-pay10.2.5 Shadow prices10.2.6 The social discount rates10.3. International practice of ex-post CBA 10.4. CBA and the decision-making process 10.5. Interpretation of variability of ex-ante vs ex-post or re-estimated internal rates of return 10.6. Comparison between ex-ante and ex-post economic rates of return 10.7. CBA and incentives10.8. Further reading10.9. Summary of Chapter 10Chapter 11: The use of cost-benefit analysis in regulatory policy Overview11.1. Adopting CBA for regulatory impact assessment: rationale and main elements 11.2. International practices 11.2.1 United States11.2.2 United Kingdom11.2.3 European Union11.2.4 Other experiences11.3. A key tool for good governance? Some critical considerations 11.4. Further reading11.5. Summary of Chapter 11