Question

a. Very briefly explain the concept of a Social Welfare Function (SWF) and its importance for project evaluation

b. Use a graph to show how to calculate the benefits from a public investment

c. Suggest 3 measures of the “value of a public investment project”. Can their use lead to conflicting results? Why?

d. Use a graph to explain the IRR measure. What are the key problems in using it for project evaluation?

you can send a and b or b and c. whatever you can do

Answer 1

Answer a.):-

he social welfare function (SWF) is a sort of social indifference map consisting of the social indifference curves (SICs). An SIC gives the various combinations of utilities of the two individuals that comprise the society, that result in the same level of social welfare (W). To show this diagrammatically, let us denote the utilities of the two consumers by U_I and U_II.

The SWF then is:

W = f(U_I, U_II).

The SICs have been shown in Fig. 21.7. Each of them shows the different combinations of U_I and U_II that give a particular level of social welfare (W). SICs are negatively sloped because as I is made better off, II must be made worse off, to give us the same W.

Answer b.):-The aim of cost benefit analysis is to channel resources into projects which will yield the greatest gain in net benefit to society. Maximization of net benefit means the maximization of social utility. Dupuit examined this problem first in 1844. Let us understand his arguments in fig. 1, drawn under the assumption of perfect competition.

  

In Fig. 1, it is assumed that the undertaking of the project lowers the marginal cost from MC₁ to MC₂. Consequently, the market price is determined at D, the point of intersection of marginal cost with the demand curve BQ. At the new price, consumers are willing to pay OBDE for the quantity OE. The area OBDE consists of two parts—OHDE, the amount actually paid and HBD, the extra amount they are willing to pay, called Consumer’s Surplus.