What is the effect of a new infrastructure on the well-being of a local community? Is a tax reform desirable? Does the privatization of a telecommunication provider increase social welfare? To answer these questions governments and their policy advisors should have in mind an operative definition of social welfare, and cannot rely on simple official statistics, such as GDP. The price we observe are often misleading as welfare signals, and costs and benefits for the society should be based on ‘shadow prices’, revealing the social opportunity costs of goods and of changes of the world. This book explains how to apply these welfare economics ideas to the real world.
After a theoretical discussion of the concept of social welfare, a critical analysis of the traditional doctrine of welfare economics embodied in the Two Fundamental Theorems, and a presentation of social cost-benefit analysis, the book introduce the readers to an applied framework. This includes the empirical estimation of shadow prices of goods, of the social cost of labour and capital, the assessment of risk. This book also includes the state of the art of international experience with CBA, including ex-post evaluation of major projects, economic rates of return in different sectors, and a case study on privatisation, is presented.
This book offers a unique and original blend of theory, empirics and experience. The theoretical discussion clarifies why shadow prices are not virtual market equilibrium prices, as they arise as the solution of a planning problem, often with governments and economic agents constrained in their information and powers. The empirical chapters show how to compute proxies of the shadow prices in simple ways. The experience chapters draw from first hand research, gained by the Author and his collaborators over many years of advisory work for the European Commission and other international and national institutions.
Table of Contents
Applied Welfare Economics: Cost-Benefit Analysis for Project and Policy Evaluation presents a consistent framework for applied welfare economics and is grounded in a comprehensive theory of cost-benefit analysis, specifically focused on offering a practical approach to the empirics of policy and project evaluation.
1.Introduction 2. The Two Fundamental Theorems Re-examined 3. On Social Welfare 4. The Social Planner and Shadow Prices in the Second-best Economy 5. The Social Cost of Goods 6. The Social Cost of Labour 7. Welfare Weights 8. Integrating Financial and Economic Analysis 9. Risk 10. Returns 11. Incentives 12. Project Evaluation Observed 13. Major Infrastructures 14. Privatisation
Massimo Florio is Professor of Public Economics and Jean Monnet Chair “Ad personam” of EU Industrial Policy at the University of Milan, Italy