Essays on Analysis of Benefit-Cost Essay

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Pareto improvements contribute to the betterment of the economy bit by bit until an economic equilibrium has been achieved where every individual is economically better off and further improvements in the economy lead to making individuals worse off. A Pareto improvement is only possible in an ideal or perfect economy where there are unutilized resources and market failures do not exist. For instance, introducing tax policies that make the rich pay more to help the poor does not promote Pareto efficiency, thus, in the real economy where political powers dictate policies, achieving Pareto improvement is hard.

For efficiency in the economy a competitive market, consumption, and production efficiency are necessary. The diagram below illustrates Pareto improvements and how they contribute to creating efficiency in the economy. ii) a potential Pareto improvement Potential Pareto improvement refers to the situation where if changes are effected in the economy one person is made better off to a larger magnitude than the other is made worse off. Thus, the change will result in the improvement of an individual’ s status by far much and any individual that is hurt in the process will be hurt to a small extent.

Thus, for potential a Pareto improvement there is no way that changes can be made in the market without any inefficiencies being created in the economy. Therefore, in potential Pareto improvements changes in the economy result in both winners and losers with the winners benefiting by far and the loss being very minimal so that it is neutralized by the loss. Thus, in potential Pareto improvement, there is a cost-benefit analysis before introducing the policy to ensure that the benefits resulting from the policy are much more than the cost resulting from it (Arrow, & Lind, 2013). (iii) The Kaldor-Hicks criterion. This is a contrast to Pareto's improvement in attaining efficiency in the economy.

In this state, changes in the economy result in the improvement of the economy through cost-benefit enhancement. This is because a change is a Kaldor-Hicks criterion if the change is able to make one better off without making the other worse off and if there are winners and losers from the change, then the winners are able to compensate the losers without altering the state that the change has put them to.

The compensation of the losers, in this case, should not be influenced by the losers in a way to prevent the winner from accepting the change. This change involves a cost-benefit analysis so that when the change is implemented the outcome will result in inefficiency in the economy. Unlike the actual Pareto improvement, the changes do not create an ideal state in the economy and do not lead to inefficiency in production, consumption and do not hinder market competition which is an important market component that facilitates efficiency (Arrow, & Lind, 2013). b) Which of these concepts can be used to formulate a practical choice criterion in benefit-cost analysis and why may it be difficult to use one or more of the others in this way According to Charness (2012), the Kaldor-Hicks criterion is the concept that can be used to come up with practical ways of cost-benefit analysis because it is more realistic than the other concepts.

This concept supports that as you make others better of you will to a small extent another individual worse, thus it is difficult to contribute to creating efficiency in the economy without affecting others.

This concept is practical because it acknowledges the place of market failure and competition in the economy which hinders the ability to make one better off without hurting another. As such this concept is reliable since it brings in lace the importance of production, allocation, and exploitation of resources. As such to enhance efficiency in the economic competition cannot be avoided. This results in increased efficiency in production and there is maximum utilization of resources available. ii) a potential Pareto improvement Potential Pareto improvement refers to the situation where if changes are effected in the economy one person is made better off to a larger magnitude than the other is made worse off.

Thus, the change will result in the improvement of an individual’ s status by far much and any individual that is hurt in the process will be hurt to a small extent. Thus, for potential a Pareto improvement there is no way that changes can be made in the market without any inefficiencies being created in the economy.

Therefore, in potential Pareto improvements changes in the economy result in both winners and losers with the winners benefiting by far and the loss being very minimal so that it is neutralized by the loss. Thus, in potential Pareto improvement, there is a cost-benefit analysis before introducing the policy to ensure that the benefits resulting from the policy are much more than the cost resulting from it (Arrow, & Lind, 2013). (iii) The Kaldor-Hicks criterion. This is a contrast to Pareto's improvement in attaining efficiency in the economy.

In this state, changes in the economy result in the improvement of the economy through cost-benefit enhancement. This is because a change is a Kaldor-Hicks criterion if the change is able to make one better off without making the other worse off and if there are winners and losers from the change, then the winners are able to compensate the losers without altering the state that the change has put them to. The compensation of the losers, in this case, should not be influenced by the losers in a way to prevent the winner from accepting the change.

This change involves a cost- benefit analysis so that when the change is implemented the outcome will result inefficiency in the economy. Unlike the actual Pareto improvement, the changes do not create an ideal state in the economy and do not lead to inefficiency in production, consumption and do not hinder market competition which is an important market component that facilitates efficiency (Arrow, & Lind, 2013).

References

Arrow, K, J, & Lind, R, C, (2013), uncertainty and the evaluation of public investment decisions, journal of natural resources policy research, (ahead-of-print), 1-16.

Bierman Jr, H, & Smidt, S, (2012), the capital budgeting decision: economic analysis of investment projects, Routledge.

Charness, G, Cobo-Reyes, R, Jiménez, N, Lacomba, J, A, & Lagos, F, (2012), the hidden advantage of delegation: Pareto improvements in a gift exchange game, the American Economic Review, 102(5), 2358-2379.

Dunn, W, N, (2012), public policy analysis, Pearson.

Gitman, L, J, & Maxwell, C, E, (2011), a Longitudinal comparison of capital budgeting techniques used by major US firms: 1986 versus 1976, Journal of Applied Business Research (JABR), 3(3), 41-50.

LeBel, P, (2011), cost-effectiveness analysis, Montclair State University, New Jersey.

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