The role of value added in benefit/cost analysis

Abstract

The problem is to determine the role of valueadded information in obtaining a measure of the benefits of public investment. Net benefit in a benefit/cost analysis is the change in economic surplus, i.e., the sum of the increase in consumer surplus and economic rent. An increase in productivity causes an increase in economic surplus.Thus, a productivity index is necessary but not sufficient information needed to measure the change in economic surplus. Information on value added can be used to establish productivity. Diewert's quadratic lemma is used to deduce an index of productivity as the difference between indexes of value added and its primary components in the context of a non-homothetic production function. It is concluded that this same procedure should be used to measure productivity in either a taut or a slack economy.* The author would like to thank Judith Brown and Jack Stabler for their helpful comments on earlier drafts of this article.

The fundamental principles of cost‐benefit analysis

“…As Given that I-O multipliers do not indicate secondary welfare changes, does I-O analysis have the capability of contributing to the estimation of secondary welfare changes in some other way? Repeated debate and inquiry over this issue as it relates to water projects has generally forwarded a negative response [Cooke, 1991;Hamilton et al, 1991Hamilton et al, , 1993Hughes and Holland, 1993;Young and Gray, 1985]. However, even the most critical literature suggests that cautious and purposeful extensions of I-O models can be successful in estimating secondary welfare changes.…”

“…Given that I-O multipliers do not indicate secondary welfare changes, does I-O analysis have the capability of contributing to the estimation of secondary welfare changes in some other way? Repeated debate and inquiry over this issue as it relates to water projects has generally forwarded a negative response [Cooke, 1991;Hamilton et al, 1991Hamilton et al, , 1993 …”