- SOCIAL COST BENEFIT ANALYSIS 3
THE LITTLE –MIRRLEES APPROACH - DR SHASHI AGGARWAL
- PROJECT MANAGEMENT
- THE LITTLE
–MIRRLEES APPROACH
- I.M.D LITTLE AND JAMES A. MIRRELESS HAVE DEVELOPED A MODEL KNOWN AS L-M MODEL OF SOCIAL COST BENEFIT ANALYSIS.
- I.M.D LITTLE AND JAMES A MIRRLEES PRODUCED THE MANUAL OF INDUSTRIAL
PROJECTS ANALYSIS IN DEVELOPING COUNTRIES IN 1968 FOR DEVELOPMENT CENTRE
OF THE ORGANIZATION FOR ECONOMIC COOPERATION AND DEVELOPMENT ( OECD)
- BROUGHT OUT SECOND VOLUME TITLED PROJECT APPRIASAL AND PLANNING FOR
DEVELOPING COUNTRIES “ IN THE LIGHT OF PRACTICAL APPLICATION TO S.C.B
- CLASSIFICATION BY LM MODEL
- TRADED AND NON TRADED
- TRADED GOODS : GOODS AND
SERVICES WHICH CAN BE IMPORTED OR EXPORTED FROM A COUNTRY ARE TRADED GOODS
- IMPORTED GOODS : SHADOW PRICE IS TAKEN AS CIF VALUE PLUS DOMESTIC COST
OF TRANSPORTATION,HANDLING INSURANCE ETC
- IN CASE OF EXPORTED GOODS: SHADOW PRICE IS EQUAL TO FOB AND TAXES AND
SUBSIDIES ARE EXCLUDED FROM IT.
- SHADOW PRICE OF TRADED GOOD IS BORDER PRICE
- REASON FOR USING THE BORDER PRICE IS THAT REPRSENTS SOCIAL OPPORTUNITY
COSTS OR BENEFITS USING OR PRODUCING A TRADED GOODS
- NON TRADED
- GOODS LIKE LAND,BUILDING AND INFRASTRUCTURE WHICH ARE NOT AVAILABLE FOR
FOREIGN TRADE ARE NON TRADED GOODS
- NO BORDER PRICE IS AVAILABLE FOR NON TRADED GOODS
- SHADOW PRICE FOR NON TRADEABLE INPUTS
EXCLUDING LABOUR IS ARRIVED AT MARGINAL SOCIAL COST AND MARGINAL
SOCIAL BENEFITS
- MARGINAL SOCIAL COST IS THE VALUE OF RESOURCES REQUIRED TO PRODUCE AN
EXTRA UNIT OF THE GOOD
- MARGINAL SOCIAL BENEFIT IS THE VALUE OF AN EXTRA UNIT FROM SOCIAL POINT
OF VIEW
- CLASSIFICATION BY LM MODEL
- BORDER PRICE IS USED FOR NON TRADED GOODS
- COMMON YARDSTICK FOR VALUING TRADEABLE AND NON TRADEABLE
- DIFFICULT TO DETERMINE MARGIAL SOCIAL COST AND MARGINAL SOCIAL BENEFIT
- LM APPRAOCH SUGGEST BREAK DOWN
THE COST COMPONENT : NON TRADEABLE INTO TRADEABLE COMPONENT,LABOUR AND
RESIDUAL COMPONENT AND APPLYING A SUITABE CONVERSION FACTOR FOR TRADEABLE
AND RESIDUAL COMPONENT
- STANDARD WAGE RATE FOR THE LABOUR COMPONENT
- THE LITTLE
–MIRRLEES APPROACH
- ASSUMES THAT A COUNTRY CAN BUY AND SELL ANY QUANTITY OF A PARTICULAR
GOOD AT A GIVEN WORLD PRICE. HENCE ALL TRADED INPUTS AND OUTPUTS ARE
VALUED AT THEIR INTERNATIONAL PRICE( CIF FOR IMPORTABLES AND FOB FOR
EXPORTABLE)
- ALL NON TRADABLE INPUTS ARE VALUED AT ACCOUNTING PRICES
- TO DETERMINE THE ACCOUNTING PRICE OF A NON TRADED INPUT. FIRST ESTIMATE
THE PROPORTION IN WHICH DEMAND FOR THAT INPUT WILL BE MET FROM INCREASED
PRODUCTION AND DECREASED CONSUMPTION
LET US ASSUME PROPORTION OF INCREASE IN PRODUCTION TO DECREASED
CONSUMPTION 2:1 THEN
- 2/3 MARGINAL SOCIAL COST +1/3 RD MARGINAL SOCIAL BENEFIT.
- L-M STANDARD WAGE RATE (SWR) =SWR =C-1/s(c-m)
- C = ADDITIONAL RESOURCES DEVOTED TO CONSUMPTION
- 1/s = SOCIAL VALUE OF UNIT SO COMMITTED
- c = CONSUMPTION OF WAGE EARNER
- m = MARGINAL PRODUCTIVITY OF
WAGE EARNER
- SWR = m +(c’-c) +(1-1/s) ( C-M)
- m = marginal product
- (c’-c) = cost of urbanization
- (1-1/s) ( c-m) = additional amount committed to consumption
- SHADOW WAGE RATE = FACTOR OF MARGINAL PRODUCTIVITY OF LABOUR,COST OF
REHABILITATION AND TRANSPORTATION AND COST OF INCREASE IN CONSUMPTION OF
THE WORKER
- THE LITTLE
MIRRLEES APPROACH
- THE NUMERAIRE:-L-M NUMERAIRE “PRESENT UNCOMMITTED SOCIAL INCOME
MEASURED IN TERMS OF FOREIGN EXCHANGE OF CONSTANT PURCHASING POWER.
REJECTED THE CONSUMPTION NUMERAIRE OF UNIDO APPROACH. SINCE THEY FEEL
CONSUMPTION OF ALL GROUPS ARE VALUABLE. UNDIO APPROACH SPECIFIC GROUP IS
SINGLED OUT
- UNCOMMITTED
SOCIAL INCOME MEANS PUBLIC INCOME WHICH IS NOT EARMARKED FOR ANY SPECIFIC
WORK
- ALL PUBLIC INCOMES ARE NOT VALUABLE. LIKE PUBLIC INCOME GENERATED BY
PARTICULAR PROJECT MAY BE EARMARKED FOR SPECIFIC PURPOSE. LIKE TOLL IS
COLLECTED FOR MAINTENANCE OF HIGHWAYS
- PUBLIC INCOME WHICH IS NOT EARMARKED ARE MORE VALUABLE
- THE RATIONALE FOR MEASURING CONVERTIBLE FOREIGN EXCHANGE IS DUE TO
REASON THAT FOREGIN AID AND LOAN ACCOUNT FOR A LARGE PART OF INVESMENT IN
THE DEVELOPING COUNTRIES AND HENCE THIS NUMERAIRE MAKES THE ACCOUNTING
RATE OF INTEREST COMPARABLE WITH INTEREST ON LOAN PAYABLE IN FOREGIN CURRENCY
or WITH LENDING ABROAD.
- USED CONSTANT PURCHASING POWER : USEFUL YARDSTICK ITS VALUE REMAINS
CONSTANT
- ACCOUNTING RATE
OF RETUN :_
- RATE USED FOR DISCOUNTING SOCIAL PROFITS. THE FOLLOWING CONSIDERATION
SHOULD BE TAKEN INTO ACCOUNT:-
- THE FUTURE SOCIAL PROFIT FOR ALL THE PROJECTS MUST BE DISCOUNTED IN THE
SAME WAY
- BALANCE BETWEEN INVESTMENT AND INVESTIBLE RESOURCES
- EXPERIENCE IS THE BEST GUIDE
- UNIDO APPROACH VS L-M APPROACH
- SIMILARITY BETWEEN UNIDO AND L-M APPROACH
- USE SHADOW PRICE AND DISCOUNTED CASH FLOW TECHNIQUES
- BASED ON THE PRINCIPLE OF EQUITY
- DIFFERENCE
- UNIDO APPROACH
- MEASURES SHADOW PRICE IN DOMESTIC
PRICE
- IT MEASURES COST AND BENEFITS IN TERMS OF DOMESTIC RUPEES
- COST AND BENEFITS IN TERM OF CONSUMPTION
- STAGE BY STAGE ANALYSIS AND FOCUSES ON EFFICIENCY, SAVINGS AND
REDISTRIBUTION CONSIDERATION IN DIFFERENT STAGES,
- L-M APPROACH
- IT AT INTERNATIONAL PRICE
- COST AND BENEFIT
IN TERMS UNCOMMITTED SOCIAL INCOME
- UNCOMMITTED SOCIAL INCOME AS YARDSTICK INSTEAD OF CONSUMPTION
- PRESENT SAVING IS MORE VALUABLE
THAN CONSUMPTION
- VIEW THESE CONSIDERATION TO GETHER
- SCBA BY
FINANCIAL INSTITUTES
- INDIAN INSTITUTIONS USE THE FOLLOWING CRITERIA
- ECONOMIC RATE OF RETURN: - MEASURES THE RATE OF RETURN TO THE SOCIETY.
ERR IS THE RATE OF DISCOUNT THAT EQUATES THE ECONOMIC COST OF THE PROJECT
TO THE ECONOMIC BENEFIT. SHADOW PRICES ARE USED TO MEASURE THE COST AS
WELL AS THE BENEFITS.
·
2. DOMESTIC
RESOURCE COST: - IT ATTEMPTS TO MEASURES THE COST OF IMPORT
SUBSTITUTIONS.
·
DRC =( VALUE ADDED AT DOMESTIC PRICES/VALUE ADDED AT WORLD PRICES) X
EXCHANGE RATE
- 3. EFFECTIVE RATE
OF PROTECTION: MEASURE THE NET PROTECTION OFFERED TO DOMESTIC PROJECTS.
- ERP =( VALUE ADDED AT DOMESTIC PRICES –VALUE ADDED AT WORLD PRICE)/
VALUE ADDED AT WORLD PRICE
- WHEN VALUE ADDED AT DOMESTIC PRICE IS HIGHER THAN VALUE ADDED AT WORLD
PRICE THEN ERP TAKES A POSITIVE VALUE.
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