CBA Accounting Framework. BCA Accounting Framework Outline Constructing KHTs Issues -- Accounting domain -- Level of aggregation -- Backward/forward Linkages.

CBA Accounting Framework

BCA Accounting Framework Outline

•Constructing KHTs

•Issues-- Accounting domain

-- Level of aggregation

-- Backward/forward Linkages

•Market Applications-- commodity taxation

-- trade liberalization

•Purposes

Constructing KHTs

Example: Flood Control and Navigation Project

Outputs

•Flood Control

•Navigation Improvement

Inputs

•Labor (newly-employed, and displaced from other occupations)

•Other marketed resources (land, capital, materials, energy)

•Nature capital (un-priced environmental input)

Input-Output Valuation and Transfer PaymentsBenefits  

Value of Flood Control – In-state Residents 12Value of Navigation Improvement – In-state Residents 7

Value of Flood Control/Navigation improvement (out-of-state) 4   Opportunity Costs  Value of labor opportunity costs -6Value of other resource costs -10Value of environmental costs -5   Transfer Payments  Contractor Compensation – Paid from State 19Gross Wage Payments to Workers – Paid by Contractor 9

Income tax payments from workers to state (25%), federal (75%) 2

Welfare loss from workers (received by federal government) 1

Stakeholder Identification

•In-state Beneficiaries

•Out-of-State Beneficiaries

•Workers (instate)

•Contractors (instate)

•State Government

•Federal Government

•Parties Experiencing Environmental

Damages (instate)

KHT Shell

Input/Output Valuation

Distribution of Benefits and Costs

KHT 1: State/Federal Financing, National Accounting Domain

KHT 2: Federal Financing, National Accounting Domain

ISSUES

Accounting Domain

Aggregation

Backward/Forward Linkages

KHT 3: State/Federal Financing, State Accounting Domain

KHT 4: Federal Financing, State Accounting Domain

C-BT Service Area

Source: Howe, C.W., Project benefits and costs from national and regional viewpoints: Methodological issues and case study of the Colorado Big Thompson Project. National Resources Journal 26: 77-93. 1986.

Benefits Costs Net Benefits

B/C Ratio

National through 1980

209.3 550.7 -341.4 0.38

T=∞ 354.8 591.8 -237.0 0.60

Regional through 1980

874.8 107.9 766.9 8.11

T=∞ 1305.3 117.5 1187.8 11.11

Summary Table1960 Present Value of C-BT/NCWCD Benefits and Costs from National and Regional Accounting Stances (Millions U.S. $ 1960)

Question: What should accounting domain be?

Answer: Philosophic question without a definitive answer.

Recommendation: Use KHTs to represent projectsat multiple accounting domains

Aggregation Issues

•Relevance of Stakeholder Effects;

Is the stakeholder group significantly affected, i.e., net effect > 0?

Is the welfare of the stakeholder group particularly policy relevant?

If yes to both questions, useful to show stakeholder column explicitly

• Information constraints

EXAMPLE: Representing Labor Market Impact

•Useful to represent labor. Impact significant, and policy relevant

•Useful to represent agencies for same reason

KHT 1: High Unemployment

Project Beneficiaries(1)

Agencies that Administer the Project (2)

Labor (3)

Net

Benefit B     B

Wage (greater than labor costs)

  -W W 0

Labor costs     -C1 -C1

Other costs   -C2   -C2

Net B -(W+C2) W-C1>0 B-(C1+C2)

EXAMPLE: Representing Labor Market Impact

•Not as useful to represent labor explicitly. Impact not as significant, and not as policy relevant. i.e., employment level does not change when workers displaced from one occupation to another, and impact is less significant than going from unemployment to employment, as in KHT1.

•KHT2 derived from KHT1 by aggregating (2) and (3) in KHT1

•Still useful to represent agencies

KHT 2Low unemployment (tight labor market)

Project Beneficiaries

Agencies that Administer the Project

Net

Benefit B   BWage = labor cost

  -C1 -C1

Other cost   -C2 -C2Net B -(C1+C2) B-(C1+C2)

Examples of Different Aggregations for the Navigation Flood Control Project

KHT 5: Federal Financing, National Accounting Domain. “Project Supplier Aggregate” of State, Contractor, Workers

KHT 6: Federal Financing, National Accounting Domain. Project Supplier and Beneficiary Aggregations

KHT 7: Federal Financing, National Accounting Domain, Private Sector Versus Public Sector

KHT 8: Federal Financing, National Accounting Domain, In-State Versus-Out-of-State

KHT 9: National Accounting DomainComplete Vertical Aggregation with disaggregated

benefits and costs (Standard BCA)

KHT 10: State/Federal Financing, National Accounting Domain

Horizontal Aggregation of Benefits, Costs, and Transfers

KHT 11: State/Federal Financing, National Accounting Domain

Horizontal and Vertical Aggregation of Benefits, Costs, and Transfers

KHT 12: State/Federal Financing, National Accounting Domain;

Complete Horizontal Aggregation (Itemization of Stakeholder Effects)(Standard Kaldor-Hicks Accounting)

S1 S2 S3 S4

Project Beneficiary

Project Input Supplier

S1 Input Supplier

S2 Input Supplier

S3 Input Supplier

Natural Resource Owner

Net

Output Value B B

User Charge -P P 0

Input Expense S1

-E1 E1 0

Labor Cost S1 -L1 -L1

Input Expense S2

-E2 E2 0

Labor Cost S2 -L2 -L2

Input Expense S3

-E3 E3 0

Labor Cost S3 -L3 -L3

Input Expense S4

-E4 E4 0

Labor Cost S4 -L4 -L4

Value of Natural Resource

-C -C

Labor Cost 5 -L5 -L5

Net B-P P-(E1+L1)

E1-(E2+L2)

E2-(E3+L3)

E3-(E4+L4)

E4-(C+L5)

B-(L1+L2+L3+L4+C+L5)

KHT Disaggregated Across Backward Linkages

Backward Linkage Disaggregation Continued

Under idealized assumptions, perfect competition, no market distortions or externalities, P=L1+L2+L3+L4+C+L5

Explanation. By the assumption of zero excess profit, net cells for all input suppliers sum to zero, implying:

E4=(C+L5); E3=(E4+L4); E2=(E3+L3); E1=(E2+L2); P=(E1+L1).

Recursive substitution gives:

E4=C+L5 into E3=> E3=L4+C+L5

E3=L4+C+C5 into E2=> E2=L3+L4+C+L5

E2=L3+L4+C+C5 into E1=>L2+L3+L4+C +L5

E1=L2+L3+L4+C +L5 into P=>P=L1+L2+L3+L4+C+L5

Implications

*As a default, project expenditure can be taken to represent costs. Thus, as a default, the benefit of a project can be compared against its expenditure=cost.

*However, if there are market distortions (taxes/subsidies) or externalities we must “shadow price” -- adjust expenditures to reflect costs.

*In theory, this adjustment should be done at every step of the supply chain – as in “life cycle assessment” of environmental impacts.

*In practice, “shadow pricing” in BCA is usually conducted just at the first step of the supply-chain.

KHTs in Market Applications

KHT Format can be applied to common

partial-equilibrium market applications

Two applications are shown in the following slides

Kaldor-Hicks Tableau of Commodity Tax

D=MB

S=MC

A

t

Q*

P*

Ql

B

Pd

C

D

EPs

0

F

GH

Consumers Producers Government Net

Q*-Q1 Range

Benefits

Transfer

Cost

-(C+D+E)

(D+E) -(D+E)

+E

-(C+D+E)

0

+E

0-Q1 Range

Transfer -A -B (A+B) 0

Net -(A+C) -(B+D) (A+B) (C+D)

Trade Liberalization:Removing existing tariff of T=Pd-Pw

Pd

Pw

MC

MB

Qd1 Qd2Qs2 Qs1

A

0

B

C

D

EF

G

KH Tableau for Tariff Liberalization

Consumer Producer Government Net

0-Qs2

Transfer +A -A 0

Qs2-Qs1

Transfer

Cost

B+C -(B+C+D)

+C+D

-D

+C+D

Qs1-Qd1

Transfer E -E 0

Qd1-Qd2

Benefit

Transfer

F+G

-G

F+G

-G

Net A+B+C+E+F -(A+B) -E C+F

Rationale for using KHTs

•Efficient Display Format: a KHT gives in one integrated assessment the Kaldor-Hicks accounting and conventional BCA input-output valuation (in its boundary rows and columns), as well as the project’s distributional effects/stakeholder impacts, including the project’s fiscal effects.

•Transparency: clearly shows stakeholder effects, and accounting domain assumptions.

• Distributional assessment: for

-- stakeholder participation

-- political implications (positive assessment of political impacts)

-- normative judgments about income distribution or other stakeholder effects