Volume 3, Issue 2

This paper reviews the theory underlying the concept of the social opportunity cost of labor (SOCL), as that concept is used in benefit-cost analysis and in applied welfare economics generally. It then presents in detail the procedures to be followed in estimating the SOCL in real-world cases. Important steps in data processing include calculating gross and net wages from data on “reported” wages. Further economic analysis involves taking account of migration patterns and of labor market duality. Estimates are made for 32 labor market areas in Mexico, covering 21 occupations for males and 19 for females.Our main results are a) that there are important differences between reported wages and the gross wages paid by employers, and also between both of these and the net wages received by workers, and b) that taking labor market duality into account leads to significant modifications of our SOCL estimates. More important, perhaps, than our specific estimates for Mexico, is the methodological framework that we use. This framework, based on the fundamental principles of applied welfare economics, can serve as a useful starting point for serious estimation of the SOCL for other countries.

The Potential Pareto criterion, or Kaldor-Hicks standard, presumes that costs are not fully compensated. Yet, uncompensated costs can incentivize costly political activity and create uncertainty about political outcomes. These consequences are not reckoned in the standard benefit-cost analysis. This study models political costs and uncertainty as a function of project parameters and political-institutional characteristics. The economic consequences of political behavior are then incorporated into an adjusted project evaluation standard. This standard assures that the project’s conventionally measured net benefits are sufficient to cover political costs and uncertainty about the decision-making outcome.

The possibility of preference reversals according to the Kaldor-Hicks (KH) criterion in benefit-cost analysis has concerned economists since Scitovsky (1941) first published his results. Lawyers and philosophers have argued that the potential of reversals calls the use of benefit-cost analysis into question, implying elimination of its use. We demonstrate that reversals occur only with inferior goods in the case of static production possibilities and that reversals occur under changing production possibilities only when production possibilities frontiers cross, which is a myopic characterization that ignores practical cases of global production possibilities.

Strategic inquiries into coal mining by Australian Governments advocate increased use of comprehensive benefit cost analyses and nonmarket valuation studies when assessing individual project proposals. The study reported in this paper addresses these Government concerns, by integrating results of a choice experiment into a benefit cost analysis undertaken for a Colliery in the Southern Coalfield of New South Wales, Australia. Results of the study were used to aid the State government in evaluating proposals for continued underground coal mining. We show that impacts of mine subsidence on streams, swamps, and Aboriginal sites negatively affect community wellbeing. Social welfare increases with the length of time that the mine provides direct employment. We demonstrate how implicit price estimates from the choice experiment can be incorporated into a benefit cost analysis of continued mining. Benefit cost analyses were carried out for a range of policy scenarios—including policies that would restrict mining activities at the Colliery and protect environmental and cultural features in the Southern Coalfield. Notwithstanding the environmental impacts generated by mining operations, continued mining is shown to be a more economically efficient course of action.

Benefit-Cost analyses of social programs often involve complex interactions between market and non-market goods. In this paper we outline one conceptual framework for incorporating the general equilibrium effects into benefit-cost analyses of changes in social programs. The goal is to develop models that are capable of capturing the interactions that take place between decisions involving marketed goods together with their effects on non-market goods and the reverse –changes in non-market goods that cause induce changes in decisions about marketed goods. These types of feedback effects are likely to result from large changes in social programs. These effects are compounded by the potential for endogenous realized outcomes that arise as a result of household actions taken in response to proposed policies. To demonstrate the importance of our conceptual discussion of these general equilibrium effects, we present an empirical example of our general equilibrium framework using teacher cuts in response to budget pressures in Maricopa County, Arizona. We find substantial differences in willingness to pay measures between models which account for endogenous education outcomes in a general equilibrium setting and those which ignore the linkages between market (housing) and non-market (education) goods in a partial equilibrium setting