The document discusses benefit-cost analysis and provides examples of its applications. It introduces benefit-cost analysis as a process that involves identifying goals and alternatives, evaluating costs and benefits of each alternative, and selecting the best option. Several examples are given that demonstrate how to apply benefit-cost analysis to decisions like selecting a college, career, or how to allocate a scarce resource like an organ for transplant. The document emphasizes that rational decision making involves systematically considering alternative options and their costs and benefits.
2. Benefit/Cost Analysis
1. Identify the goal and the resources available to
reach that goal.
2. Identify alternative uses of the resources to
achieve the goal.
3. Evaluate the advantages and disadvantages of
each alternative use of the resources.
4. Select the best alternative, recognizing that
alternative as the choice and the best alternative
not chosen as the opportunity cost.
5. Re-evaluate
Lesson 2: Benefit/Cost Analysis 09/28/2000 2
3. Benefit/Cost Analysis
The Grid
1. Identify goal/decision
2. Find and list alternatives
3. Consider the criteria and use the criteria to
evaluate the alternatives -- advantages and
disadvantages of each alternative
4. Choose
5. Re-evaluate
Lesson 2: Benefit/Cost Analysis 09/28/2000 3
4. Goal: Select a College
Affordable Fun Location Quality Prestige Acceptance
CSUSB ++ + - +++ +
Local
Community
College
+++ - + +++
Berkeley -- +++ ++ +++ +++ -
UCSD - ++ +++ ++ ++ -
Lesson 2: Benefit/Cost Analysis 09/28/2000 4
6. Goal: Career
Decent More
Salary Training Fulfilling Interesting Total
Hair + - + ++ +++
Dresser
Fast Food -- ++ -- -- ----
Legal
Assistant
+++ -- ++ + ++++
School ++++
Aide
++ - +++ +++ +++
Lesson 2: Benefit/Cost Analysis 09/28/2000 6
7. Select a Career
OPPORTUNITY COST
CHOICE
Lesson 2: Benefit/Cost Analysis 09/28/2000 7
8. Goal: Select a Major
Lead to How much Necessary Classes
Like it?
job? school? skills? available?
English
History
Math
Economics
Lesson 2: Benefit/Cost Analysis 09/28/2000 8
9. Possible Liver Recipients
1. A 15 year old girl from India. She has excellent health with the exception of a failing
kidney. Her parents are well-educated and quite wealthy. They are major
philanthropists who have contributed big bucks to educational institutions in India.
They are willing to pay for all medical expenses and to make a major donation to the
hospital that performs the transplant.
2. A 30 year old construction worker. He has no other health problems. He is the father
of two children. He and his wife scrape by on one salary. She stays home with the
children who are 5 and 7 years old. His health insurance will pay a small part of the
expenses of the operation.
3. A 55 year old college minister, beloved by her congregation, good health except for
the liver problem, low income, no health insurance, congregation has organized a
pledge drive to secure funds, won’t come close to covering costs of operation.
4. A 65 year old Latin leader who has won the Nobel Peace Prize for bringing order and
democracy to his formerly war torn nation. Good health, family of four, government
will pay all medical costs.
5. A retired and beloved baseball player. 66 years old. Has struggled with alcohol
problems most of his life. Could pay a small portion of the costs of the medical costs.
Lesson 2: Benefit/Cost Analysis 09/28/2000 9
10. Goal: Allocate a Liver
Indian
Girl
Const
Worker
College
Minister
Latin
Leader
BBall
Player
Lesson 2: Benefit/Cost Analysis 09/28/2000 10
11. Benefit/Cost Analysis
The Apron
What resources, what goal?
Alternative resource allocations
Advantages and disadvantages of alternatives
Choice
Opportunity cost
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14. Solomon
Three Alternatives
Lesson 2: Benefit/Cost Analysis 09/28/2000 14
15. Choosing among alternative
resource use
Use resources to preserve tortoise or raven?
Use land to preserve wildlife or provide
recreation?
Use water for gold mining or agriculture?
Use land in Egypt to preserve monuments
or provide water for food?
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16. Alternative allocations
of your money
(embedded human capital)
Eat at home or eat out?
What video?
School books or entertainment?
Brand name or generic shoes?
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17. Alternative allocations
of your human capital
Study or sleep?
Golf or tennis?
Work or school?
Going to the prom with Gary
or William?
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18. The importance of alternatives
Power – an impressive list of alternatives
in terms of quantity and quality
Poverty – few good alternatives
Your job in school – build your human
capital so that you will have power
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19. Rationality and Self-Interest
versus Selfishness
If you have a goal, economic
reasoning can help you.
Lesson 2: Benefit/Cost Analysis 09/28/2000 19
