Cost-Benefit Analysis (CBA) has proved to be an appropriate method for assessing welfare impacts of infrastructure projects. Its main advantage relies on its capability for measuring the social benefits, which represents a step further from traditional income cash flow. Social benefits also account for intangibles, such as externalities, or willingness to pay, which may be higher than market prices. At the same time, it accounts for social costs, which take into account the opportunity costs that do not need to be the same as paid costs. One common approach taken is comparing surplus changes before and after a project infrastructure investment. Surpluses are usually measured for consumers, firms, workers, tax-payers and other agents or entities, such as the environment. CBA usually focuses on the primary market and the surplus changes can be calculated for all of them with relevant case study information.
However, if the infrastructure investment project has got implications on many sectors, the surplus calculations get more difficult to measure. Moreover, if the agents can obtain a benefit from the project implementation and it is translated into higher production, employment, capital rents or wages, an additional income effect is produced in other agents through additional consumption. In macroeconomic terms, the former effect is known as indirect effect, whereas the latter effect is known as induced effect. All these indirect and induced effects are usually missing in CBA.
Economic impact assessments (EIA) deal with macroeconomic impacts such as GDP or employment. A macroeconomic approach can be very useful for measuring the direct, indirect and the induced effects. Input-Output Analysis (IOA) employs sectorial matrices that relate all sectors in terms of inputs required to obtain certain outputs. It provides the key information to understand linkages among all sectors of the economy. Thus, the indirect effects can be measured. Additionally, Social Accounting Matrices (SAM) extend IOA to take into account income distribution. Thus, the induced effects can be measured. IOA and SAM show a static picture of the linkages of the economy, where constraints in resources are missing. In order to take into account such resource constraints, price and wage variations and its sensitivity, a Computable General Equilibrium (CGE) can be implemented. It extends the SAM and it employs elasticities and macroeconomic equations to describe the economic relationships. It allows for a better understanding of the dynamics of the economy over time. For this reason, this research proposal suggests employing CGE to measure indirect and induced effects.
The challenge relies on how we can combine both tools. For instance, from a CBA perspective, an increase in GDP does not mean a homogeneous increase in social benefits. Moreover, an increase in employment is a positive output in EIA but a social cost in CBA terms. This research proposal tries to shed light on how this C-Bridge can be developed. The objective is twofold. On the one hand, a theoretical understanding of the bridge between CGE and CBA is pursued. On the other hand, empirical concerns are also considered, so that, at the end, divergence between CGE and CBA is identified and quantified depending on different market structure cases. The learning process consists of developing simple models which are controlled by alternative simulations. Later on, full models are also developed and simulations are run for three case studies.
June 2020 update