Transcript COST-BENEFIT ANALYSIS

Fin650: Project Appraisal
Lecture 9
Comparison of Financial and
Economic Appraisal
1
Analyzing Economic Costs and Benefits in an
Existing Market
(a) Total Economic Benefit
(b) Total Economic Cost
Price in Rand/Unit
Price in Rand/Unit
Consumer
surplus
P
Producer
surplus
Pmax
Pmax
Supply
m
C
Pm
Demand
0
Qm
E
0
Units of Output
(c) Total Economic Benefits and Costs
Price in Rand/Unit
Pmax
Pm
Supply
C
Demand
E
0
C
Qm
Units of Output
Qm
Units of Output
Analyzing Economic Costs and Benefits in an
Existing Market

The gross economic benefits from the consumption
of the output from this industry are greater than the
financial revenues received by the suppliers due to
the consumer surplus enjoyed by the consumers of
the output.

Economic cost of producing the output is less than
the financial revenues received by the suppliers due
to the producer surplus enjoyed by the suppliers.

The implication of these two facts is that the
financial price of a unit may be different from its
economic price even in the absence of distortions.
Analyzing the Economic Benefits of an Output
Produced by a Project
Economic Benefits of a New Project in an Undistorted Market:
Upward sloping supply (a large project)
4
Analyzing the Economic Benefit of an Output
(subject to tax) Supplied by a Large Project
5
Analyzing the Economic Cost of an Input Demanded
by a Project (Cont’d)

If the quantity demanded by the project is relatively
small compared to the size of the market then there
will only be a very small change in the market price.

In such a situation and given that we are operating in
an undistorted market, the gross financial cost to the
project will be equal to the gross economic cost.

A difference only arises when the change in the
quantity demanded by the project is sufficiently large
to have a large impact on the prevailing market price.
6
Analyzing the Economic Cost of an Input Demanded
by a Project (Cont’d)

If the quantity demanded by the project is large
compared to the size of the market then there will
only be a change in the market price.

Government purchasing land


Purchase price, P2*(q-q1)

Economic costs
P1  P2
* (q  q ' )
2
Land taken through eminent domain

Economic costs Pres  P2
2
* (q  q ' )
7
Analyzing the Economic Cost of an Input Demanded
by a Project
Economic Cost of an Input Demanded by a Project in an
Undistorted Market: Inelastic supply
8
Analyzing the Economic Cost of an Input Demanded
by a Project
Economic Cost of an Input Demanded by a Project in an
Undistorted Market:Upward sloping supply curve and a large Project
9
Analyzing the Economic Cost of an Input (subject to
tax) Demanded by a Project

Large project subject to purely revenue
generating input tax

General principles:

When a project reduces the quantity of input available
for other people, use the willingness to pay (as indicated
by the demand curve) as value

When a project increases the quantity of input that the
market must produce, use marginal cost for the value of
the added input

Tax is treated as transfer
10
Analyzing the Economic Cost of an Input (subject to
tax) Demanded by a Project
11
Class Exercise

A project uses large quantity of cements
to build a bridge. Cements are subject to a
Tk. 1/bag tax and 100 million bags will be
used to build the bridge. As a result of the
bridge, the price of cement including the
tax, will rise to from Tk. 2 to Tk. 2.30 per
bag and private consumers are expected
to decrease their consumption by 20
million bags. What costs should be
attached to this input?
12
Analyzing the Economic Cost of an Input (subject to
taxes related to externalities) Demanded by a Project
13
Economic Evaluation of Non-Tradable Goods and
Services in Distorted Markets

Distortions are defined as market imperfections.

The most common types of these distortions are in
the form of government taxes and subsidies. Others
include quantitative restrictions, price controls, and
monopolies.

We need to take the type and level of distortions as
given and not changed by the project when estimating
the economic costs and benefits of projects.

The task of the project analyst or economist is to
select the projects that increase the net wealth of
country, given the current and expected regime of
distortions in the country.
14
Valuation of Benefits in Distorted Markets

If market or government failures distort the relevant product
market, then project benefits are measured by the changes in
social surplus resulting from the project plus net revenues
generated by the project

Monopoly

As in the competitive case, the social surplus generated by the
output produced and sold in the monopolist is represented
graphically by the area between the demand schedule and the
marginal cost curve that is to the left of the MR and MC curves



Social surplus above the price is received by the consumers and
that below the price is captured by the producer
Monopolist is a part of the society; therefore benefits accruing to
them count.
Breaking the monopoly will increase social surplus
 Deadweight loss would disappear
 Consumers will capture a part of the monopolists producers surplus,
viewed as transfer
15
Valuation of Benefits in Distorted Markets
16
Valuation of benefits in Distorted Markets

Natural Monopoly

Four policies




Allow monopoly, deadweight loss abc, monopoly
profits=Pmafg
Regulate monopoly, set PR = AC, eliminates monopoly
profits, transferring social surplus to persons using the
road, expands output, reduces deadweight loss from area
abc to area dec, society’s benefit adeb
Require road authority to set Pc , eliminates deadweight
loss, price is less than AC, revenue no longer cover costs,
subsidy would be required
Free access, marginal costs exceed willingness to pay,
deadweight loss chQo, no toll revenue, entire construction
and operation costs have to be subsidized
17
Valuing Impacts from Observed Behavior

In project analysis we estimate change in social
surplus to value impact of the programme/project

Need to know the shapes of the supply and
demand curves

There are well functioning competitive markets,
know only one point on the demand and supply
curves, represented by the equilibrium

Goods that are rarely traded in markets-health and
safety, pollutions, access to scenic areas

Commodities that are traded in imperfect markets,
monopoly,
externalities
asymmetric
information,
and
18
Demonstrations


Estimating benefits and cost based on demonstration or
pilot programs
Alternative evaluation designs




Limited applications



Employment and training programs, people oriented service
A new dam, on a small scale, pilot basis cannot be done
Advantages



Classical experimental design with or without baseline data
Simple before and after comparison
Non-experimental comparison with or without baseline data
A bad idea can be abandoned
Needed adjustment in the program may be made
Disadvantages


May not readily translate into a large-scale program
Uncertainty concerning external validity
19
Direct Estimation of Demand Curves
 Three
possibilities
 Knowing
one point on the demand
curve and its slope or elasticity
 Extrapolating from a few points, know
a few points on the demand curve
that can be used to predict another
point of relevance to policy evaluation
 Econometric estimation with many
observations, have a sufficient
number different observations of
prices and quantities
20
Class Exercise






Current refuse disposal is 2.6lbs per person per
day and disposed off in containers of 20lbs
Currently there is no charge on refuse
collection
Marginal social cost (collection + landfill costs)
= 0.6/lb
In new Delhi for each Rupee increase in price of
refuse collection reduces wastes by 0.4 lb/p/d
Assume a linear demand curve
Evaluate impact of imposition of a fee of
0.05/lb, i.e. Tk. 1 for each container of 20lbs,
MPC is less than MSC
Using a Slope Estimate

Linear demand curve
q   0  1 p
Slope or elasticity estimates from previous
research
Assuming α0 = 2.60, α1= - 0.4
 Estimating social surplus gain from
charging for refuse disposal


A graphical illustration
22
Social Surplus Gain from Refuse Fee
23
Using an Elasticity Estimate

We have an estimate of price elasticity of
demand from previous research





εd = α1 p/q
α1 = εd q/p
εd=-0.12
p = 0.81, and q = 2.62, α1 = -0.40
Construction of a linear demand curve to
measure changes in social surplus requires either
a direct estimate of the slope itself or an estimate
of the price elasticity of demand and the price
and quantity at which the elasticity was
estimated
24
Extrapolation and Econometric Estimation

Effect of a fare increase on bus ridership


If the past fare increase of Tk. 1 resulted in 1000 fewer
riders , then it may be reasonable to assume that a
further increase of Tk 1 will have the same effect
Assumed functional relationship between the outcome
and the policy variable



Linear functional forms can produce very different
predictions than constant-elasticity functional forms
Further we extrapolate from past experience, the more
sensitive are our predictions to assumptions about
functional form
Econometric estimation with many
observations

If many observations of quantities demanded at different
prices are available, then it may be possible to use
econometric techniques to estimate demand schedule
25
Imputing a Demand Curve from Two Points
26
Market analogy method



Government supply many goods that are also
provided by the private sector, e.g. education
Using price and quantity of an analogous private
sector good to estimate the demand curve for a
publicly provided good
The market price of a comparable good in the
private sector is an appropriate shadow price for
a publicly provided good, if it equals the average
amount that users of the publicly provided good
will be willing to pay


Private and public goods must be comparable in quality of
service and other important characteristics
Limitations:

Using private sector revenues would underestimate benefits,
because it omits consumer surplus
27
Market analogy method

Using the market analogy method to value
time saved



Bridge, highway improvement saves time
Wage rate
Limitations of wage rate






Benefits, should be added to wages
People work during travel
Truck drivers work, to be counted, wage+benefit
Taxes, After tax wage rate plus benefit
Pleasure travel
Dirty, dangerous jobs, unemployed
28
Class Exercise I
Using Airbags in car would increase
probability of survival in a accident from p
to p+w.
 Additional cost of an airbag is Tk.1,000
 W=1/1000
 Calculate value of life.

Class Exercise II
One type of construction job has a 1/1000
greater chance of a fatal injury in a year
than another type of construction job.
 Suppose riskier job pays a salary that is
Tk. 2000 higher than the safer job
 Calculate value of life.

Market analogy method

Using the market analogy method to value life
saved

Foregone earnings method


Value of life saved equals the present value of future
earnings
Consumer purchase studies
(p+w)V(Life) –Tk. 1000 = pV(life)
(p+w)V(Life) - pV(life) = Tk. 1000
wV(life) = Tk. 1000
V(life) = Tk. 1000 /w, w =1/10,000
V(life) = Tk. 1000 /(1/10,000)
= Tk. 10,000,000

Labour market studies
(1/1000) V(life) = Tk. 2000
V(life) = Tk. 2 million
31
Shadow Prices
When a market does not exist or market
failure leads to a divergence between
market price and marginal social cost,
analysts try to obtain estimates of what
market price would be if the relevant good
were traded in a perfect market. Such an
estimate is called a shadow price
 Estimates of shadow prices when markets
are missing


Examples: value of a unit of time, statistical
life, or the (negative) value of a particular type
of crime
Shadow Prices
Shadow Prices
Shadow Prices
Plug-Ins for Value of Travel Time Saved
Shadow Prices
Plug-Ins for Value of Recreational Activities (in 1999 U.S. dollars)
Shadow
Prices
Plug-Ins for Value of Environmental Impact (in 1999 U.S. dollars)
Project Analysis in Developing Countries

Project Analysis in developing countries have much in
common with Project Analysis in industrialized countries

The main distinguishing characteristic of Project Analysis in
developing countries is the much grater emphasis on
adjusting the market prices of project output and inputs so
that they more accurately reflect their value to society


Markets are more distorted in developing countries

Segmented labor market

Overvalued exchange rate

Tariffs, taxes, and import controls

Formal and informal credit markets
Use shadow prices/accounting prices instead of market
prices
LMST Accounting Price Method


Developed by UNIDO, I.M.D Little and J.A.
Mirrlees, synthesized by Lynn Squire and
Herman G. van der Tak
The LMST methodology


Use world prices as shadow price for all project inputs
and outputs that are classified as tradable
World prices are less distorted than domestic prices



Imported input valued at import price, CIF
Exported output valued at export price, FOB
Examples


Steel plant
Agricultural crop
LMST Method in Practice

Shadow pricing involves multiplying each
market price by an accounting price ratio



APR for good i = accounting/shadow price of
good i /market price of good i
Shadow price of good i = APR of good i
*market price of good i
Small country assumption
Shadow price
output that is
 Shadow price
 Shadow price
(electricity)

of an imported input or an
an import substitute
of an export
of a non-tradable good
Accounting Price of an Import

CIF price * Exchange rate = World Price in
domestic currency


Accounting prices






Use shadow exchange rate, if there is a big
difference between official and market
exchange rates
CIF price: APR = 1
Tariff : APR = 0
Transport cost: APR = 0.5
Distribution cost: APR = 0.8
Weighted APR: 0.85
Shadow price= Market Price*APR
Accounting Price of an Imported Good
Item
Dollar
Price
Market
APR
Price(Tk)
Accounting
Price
CIF Price
40
2800
1.00
2800
Tariff
-
350
0.00
-
Transport
-
280
0.50
140
Distribution -
175
0.80
140
3605
0.85
3080
Total
Accounting Price of an Export
FOB Price
 Export tax is a transfer between foreign
purchaser (no standing) and the
government: APR= 1
 Transport for export: APR= 0.5
 Factory gate price: APR=1
 Shadow price
= 5180*1+70*0.5+1750*1
=Tk. 6965

Accounting Price for Export
Item
FOB Price
Dollar
Price
100
Export tax
25
1750
1.0
1750
1
70
0.5
35
74
5180
1.0
5180
Transport
Factory
Gate
Market
APR Accounting
Price(Tk)
Price
7000
-
Transport(d)
-
120
0.5
60
Distribution(d)
-
300
0.8
240
Accounting Price of Non-tradable
LMST involves determining the equivalent
value of non-tradables in world prices
 Breaking down the cost of inputs into
traded, non-traded and labor components
 Multiply market price by applicable
accounting price ratio





CIF prices: APR =1
Domestic transfer (tariffs and taxes): APR = 0
Labor: APR = 0.6
Standard conversion factor: 0.80
Accounting Price for Electricity Valued or Marginal
Cost of Supply (in thousands of pesos)
Conversion factors


Semi-input-output analysis
Consumption conversion factors
Weighted average of accounting price ratios for a
nationally representative market basket of goods
Standard conversion factors
SCF = (M+X)/[(M+ Tm –Sm)+(X-Tx+Sx)]

Where M= Total value of imports(CIF)
X = Total value of exports(FOB)
Tm = Total tariff on imports
Tx = Total taxes on exports
Sm = Total subsidies on imports
Sx = Total subsidies on exports
Average value of SCF for different countries 0.8
(ranges between 0.59-0.96)
Shadow Pricing when Goods are in Fixed Supply



Constant marginal costs up to capacity level, up to Q1 and
then completely inelastic
Whether the fixed supply is binding or not
If not binding (demand with the project within the elastic
range), no change in market price. Would not affect the
current consumers of electricity




Would require additional input to produce additional electricity,
use shadow cost method for non-tradables
If binding, (demand with the project is in the inelastic
range), market price will increase. Current consumers lose
surplus and producers gain surplus
Measured in market prices, the cost of electricity would
equal [(P1+P2)/2](Q1-Q2)
To convert into shadow price equivalent, multiply the cost
by the consumption conversion factor( weighted
average of accounting price ratios for a nationally
representative market basket of goods).
Shadow Pricing when Electricity is Completely Elastic and
Inelastic
The Shadow Price of Labor




Location of the project
Source of labor
Accounting price ratio of type j labor = Shadow
price of type j labor/ the market wage for type j
labor
Shadow price of foreign workers



SWf = [h + (1-h)(CCF)](PW)
Where PW is the project wage, h is the fraction of PW
sent or taken home, and 1-h is the fraction spent
domestically
Rural market wage

RMW = 0.5(Tk.50) + 0.25(Tk.10) + 0.25(Tk.15) = Tk.
31.25
Intermediate Good and Asset Valuation Method

Intermediate good method


If the output from a project is to be used as an input
into the production of some other good, then the effects
on profits of the other, downstream industry can be
included as a benefit, e.g. irrigation, education and
training, value added
 Excludes consumer surplus
 Double counting, demand curve for water, benefits to
farmer
Asset valuation method

Increase or decrease in the property value following
implementation of a project, e.g. location of jail, park



Ex post CBA
Assumes other factors remaining the same
Not applicable in case of mobile assets
51
Travel Cost Method


Used in valuing recreational sites
Steps in travel cost method





Visitors from different origins bear different travel costs
depending on their proximity to the site
The resulting differences in total cost, and the
differences in the rates of visit that they induce provide
a basis for estimating demand curve for the site
Select a random sample of households within the market
area of the site
Survey the households to determine their number of
visits to the site over some period of time, all of their
costs involved in visiting the site, the cost of visiting
substitute sites, their incomes, and their other
characteristics
Specify a functional form for the demand schedule and
estimate it using the survey data
52
Illustration of the Travel Cost Method
Zone
Travel
Time
(hours)
A
0.5
B
Actual
total
cost per
person
(Tk.)
Average
number
of Visits
per
Person
Consumers
Surplus per
Person
Consumers
Surplus per
Zone (Tk.
thousands)
Trips per
Zone
(thousands)
2
20
15
525
5,250
150
1.0
30
30
13
390
3,900
130
C
2.0
90
65
6
75
1,500
120
D
3.0
140
80
3
15
150
30
E
3.5
150
90
1
0
0
10
10,800
440
Total
Travel
Distance
(km)
53
Travel Cost Method
54
The Social Discount Rate: Main Issues



How much current consumption society is willing to give up
now in order to obtain a given increase in future
Consumption?
It is generally accepted that society’s choices, including the
choice of weights be based on individuals’ choices
Three unresolved issues




Whether market interest rates can be used to represent how
individuals weigh future consumption relative to present
consumption?
Whether to include unborn future generation in addition to
individuals alive today?
Whether society attaches the same value to a unit of
investment as to a unit of consumption
Different assumptions will lead to choice of different
discount rate
55
Does the Choice of Discount Rate Matter?


Generally a low discount rate favors projects with
highest total benefits, irrespective of when they
occur, e.g. project C
Increasing the discount rate applies smaller
weights to benefits or (costs) that occur further in
the future and, therefore, weakens the case for
projects with benefit that are back-end loaded
(such as project C), strengthens the case for
projects with benefit that are front-end loaded
(such as project B)
56
NPV for Three Alternative Projects
Year
Project A
Project B
Project C
0
-80,000
-80,000
-80,000
1
25,000
80,000
0
2
25,000
10,000
0
3
25,000
10,000
0
4
25,000
10,000
0
5
25,000
10,000
140,000
Total benefits
45,000
40,000
60,000
NPV (i=2%)
37,838
35,762
46,802
NPV (i=10%)
14,770
21,544
6,929
57
Appropriate Social Discount Rate in Perfect
Markets
•
•
•
•
As individuals, we prefer to consume immediate benefits
to ones occurring in the future (marginal rate of time
preference)
We also face an opportunity cost of forgone interest when
we spend money today rather than invest them for future
use (marginal rate of return on private investment)
In a perfectly competitive market:
rate of return on private investment = the market
interest rates = marginal rate of time preference (MRTP)
The rate at which an individual makes marginal trade-offs
is called an individuals MRTP
Therefore, we may use the market interest rate as the social
discount rate
58
Equality of MRTP and Market Interest Rate
59
Alternative Social Discount Rate in Imperfect
Markets
Six






potential discounting methods
Social discount rate equal to marginal rate of return on
private investment, rz
Social discount rate equal to marginal rate of time
preference, pz
Social discount rate equal to weighted average of pz, rz
and i , where i is the government’s real long-term
borrowing rate
Social discount rate is the shadow price of capital
A discount rate that declines over the time horizon of the
project
A discount rate SG, based on the growth in real per capita
consumption
60
Alternative Social Discount Rate in Imperfect
Markets
Using
the Marginal Rate of Return on Private
Investment


The government takes resources out of the private sector
Society must receive a higher rate of return compared to
the return in the private sector
Criticism

Too high





Return on private sector investment incorporates a risk
premium
Government project might be financed by taxes, displaces
consumption rather than investment
Project may be financed by low cost foreign loans
Private sector return may be high because of monopoly or
negative externalities
Government investment sometimes raises the private
return on capital
61
Alternative Social Discount Rate in Imperfect
Markets
Using

the Marginal Social Rate of Time Preference, pz
Numerical values of pz

Real after-tax return on savings, around 2 percent for the US
economy
Criticisms



Individuals have different MRTP
How to aggregate such individual MRTP
Market interest rate reflects MRTP of individuals currently alive
Using

the Weighted Social Opportunity Cost of Capital
WSOC= arz + bi + (1-a-b)pz
Numerical Value, 3 percent for the US economy
62
Harberger’s Social Discount Rate
Social
discount rate should be obtained by weighting rz and pz
by the relative size of the relative contributions that
investment and consumption would make toward funding the
project
s = arz + (1-a)pz,
where a = ΔI/(ΔI+ ΔC) and (1-a) = ΔC/(ΔI+ ΔC)
 Savings are not very responsive to changes in the interest
rate, ΔC is close to zero
 The value of the parameter a is close to one
marginal rate of return on private investment rz is a good
approximation of true social discount rate
The
63
Alternative Social Discount Rate in Imperfect
Markets
Criticisms


Use


of WSOC
Criticisms applicable to use of rz and pz applies
Different discount rates for different projects based on source
of financing
the Shadow Price of Capital
Strong theoretical appeal
Discounting be done in four steps




Costs and benefits in each period are divided into those that
directly affect consumption and those affect investment
Flows into and out of investment are multiplied by the shadow
price of capital θ, to convert them into consumption equivalents
Changes in consumption are added to changes in consumption
equivalents
Discounting the resultant flow by pz
64
Alternative Social Discount Rate in Imperfect
Markets

Shadow Price of Capital
(rz   )(1  f )

pz  rz f   (1  f )
Where rz is the net return on capital after depreciation, δ is
the depreciation rate of capital, f is the fraction of gross
return that is reinvested, and pz is the marginal social
rate of time preference



Numerical Values for the θ,SPC, 1.5-2.5 for the US
economy
Applying SPC in Practice
Criticism of calculation and use of the SPC
65
Alternative Social Discount Rate in Imperfect
Markets


Using Time-Declining Discount Rates
Conclusion, Social Discounting in Imperfect Markets



If all costs and benefits are measured as increments to
consumption, use MSRTP, pz, Boardman et. Al. suggests a
value of 2 percent, sensitivity 0-4 percent
If all costs and benefits are measured as increments to private
sector investment, use MRROI, rz, Boardman et. Al. suggests a
value of 8 percent, sensitivity 6-10 percent
If all costs and benefits are measured as increments to both
consumption and private sector investment, use SPOC, θ, to
increments in investment and then discount at MSRTP,
Boardman et. Al. suggests for SPOC, a value of 1.65 percent,
sensitivity 1.3-2.7 percent; and ΔI = 15 percent and, ΔC= 85
percent, in the absence of information
66
The Social Discount Rate in Practice




Many Government Agencies do not discount at all
Shadow Price of Capital is rarely used
Governments do not use time-varying discount
rates
Constant positive rate that varies from country to
country




US, 7-10 percent
Canada, 10 percent, sensitivity 5-15 percent
0-3 percent for Health and Environment Projects
ADB, EIRR of 10-12 percent
67
Valuing Human Lives


In many projects, one of the benefit generated is some
reduction in the number of people who die due to some
cause
Why put a value on human life?



Consider a project that will reduce death due to a certain
cause by 3 per year while costing Tk. 5 million, should the
project be undertaken?
Project A will have PVNB of Tk. 5 million while saving no lives
and project B will have PVNB of Tk. 2 million while saving one
life, which project is preferable?
Distinction between known life and statistical life


Known life, a hostage being held, a child stuck in a well, this is
a known life, and the value attached to this known life is
usually very, very high
Statistical life, is the result of a change in the level of risk
faced by a population multiplied by the size of the population,
e.g. a project that reduces the chance of accidental death by
one in one million for a population of one million people will
save one statistical life
68
Valuing Known Lives

Valuing known lives: human capital
approach


Gross value method: Look at the present value
of someone’s lifetime earnings. Sum over the
probability of survival multiplied by the present
value of earning in each period
Net value method: Look at the present value
of expected income less expected
consumption. Sum over the probability of
survival multiplied by the present value of
earning less consumption in each period,
probably negative for retirees and may be for
children, leading to some disturbing policy
implications
69
Valuing Known Lives






Assumes life has value only because of
productive capacity, zero value to own happiness
and well being
Individual does not have a standing, everyone
else has
More frequently used in valuing known life
instead of a statistical life
Used by courts, identity of the dead person is
known
In case of most projects, it is not known whom
the project will save or, more interestingly, whom
the project may kill
Valuing known lives is not subject of a CBA, e.g.
suicide mission
70
Valuing Statistical Lives

With most projects, the benefits or costs in terms of lives saved or
lost is really an expected value resulting from a change in the
level of risk faced by a fairly large number of people

ΔR is the change in risk of death
If there are N people in the group, then the
expected number of lives saved is N* ΔR
 Valuation attached to ΔR

Russian Roulette


What would one be willing to pay to reduce the number of bullets? To avoid
playing at all? To have more chambers filled with bullets?
Value of statistical life (VSL)



Two identical jobs except that one has an increased probability of
death in each year of 0.0001. If the difference in annual salary at the
two jobs is Tk. 500, then the VSL, based on these two jobs would be
Tk. 500/0.0001 = Tk. 5,000,000
Is the VSL of Rich higher than that of Poor? VSL of people in rich
countries higher than those of poor countries?
Income elasticity of VSL is in the range of 0.50 to 0.60, i.e. a 10%
increase in income results in a 5-6% increase in VSL
71