Public Sector Economics Wk 4

What is the formula for projecting present follars into the future

R0 x (1+r)T

Projecting future dollars into the present

RT/(1+r)T

What is the formula for the present value of a stream of money

R0 + R1/(1+r) + RT/(1+r)T

How to take into account inflation in PV

R0 + (1+ inflation)R1/(1+ inflation)(1+r) + (1 + inflation)TRT/(1+inflation)T(1+r)T

When should a prohect be undertaken

must be admissible and the preferred projec has the higher present value

When is a project admissiable

if the present value is positive

Net Present value formula for admissibiliy test

B0 - C0 + B1-C1/1+r +BT - CT/(1+r)T

What are the alternativ ways to see if a project should be undertaken

internal rate of return and benefit cost ratio

Internal rate of return formula

B0 - C- + B1-C1/1+p +BT-CT/(1+P)T = 0

Benefit cost ratio formula

B/C

Benefit cost ration formula for B

B0 + B1/1+r + BT/(1+r)T

Benefit cost ration formula for C

C0 + C1/1+r + Ct/(1+r)T

Efficient utilisation

if the minimum scale capcoty exceeds the demand at zero price then efficentcy requires that no price be charged and noprivate firm will take it

Decision to undertake a project - if no price is charged

compare the CV with the total costs

Decision to undertake a project - if price is charged

compare revenues + new C with the total costs

Decision to undertake a project - when should we

when net benefit is positive and the largest

existence values def

even if they dont take advantage of it themselves, they still value it

Why does shadow prices exist

market failure

What is the social discount rate

the rate at which society is willing to trade off present consumption for future consumption

What does a high social discount rate mean

don’t care about the future

Exepcted value formual

weighted average of the possible outcomes

Certainty equivalent def

the amount of money that would make the decision maker indifferent between two amounts

Expected utility formula

weighted average of the utilities of the outcomes