Conceptual Readings:

1. Theory and Practice in Policy Analysis, Chapter 1 – Most people have not spent much
   time thinking about the approach or perspective we ought to use when making important
   decisions. A major goal of this class is to teach the perspective and tools of a “policy
   analyst”. This first chapter serves as a bit of an introduction to some of the ideas of how
   that ought to work, which is actually still being debated. This chapter basically asks: what is
   the point of policy analysis? I would suggest that it is actually a more complicated question
   than it seems and there are different reasonable answers. I’m looking forward to hearing
   your thoughts.
   Questions to think about: What do you think of the different “models” of the ways that
   analysis contributes to the policy process? Any of them seem better/worse than others in
   your experience? If we are doing policy-relevant research/analysis, what should our goals
   be? Is policy analysis really different from science? Do you agree with the author
   throughout or do you take issue with his perspective anywhere?
2. Theory and Practice in Policy Analysis, Chapter 3 – Around the world, benefit-cost
   analysis is the primary decision-making criteria of governments and corporations. Doing a
   benefit-cost analysis is pretty conceptually simple (you may already have experience with
   BCA). But there are a lot of important assumptions that go into BCA, most of which are
   never even considered by those who actually carry it out. This chapter (and the next
   reading) basically dig into the ethics of BCA, including ways that it might be unfair. We
   already use this tool all the time to make important decisions, and these readings dig into
   what BCA can and can’t tell us.
   Questions to think about: What is the issue with using prices to estimate benefits and
   what is the correct way of framing them? Should the value of (all) things be based on the
   number of people that use them? What are some issues with “willingness-to-pay” as a
   stand-in for economic value? What is the Pareto criterion and why is it almost impossible to
   meet? What is the Kaldor-Hicks criterion and what are some ethical issues with it? What
   are some of the practical/political issues with the way that BCA is applied? What do you
   think about the Precautionary Principle as an alternative to BCA? In the end, is BCA a useful
   tool?
3. Lave “Benefit-Cost Analysis: Do the Benefits Exceed the Costs?” –BCA is an extremely
   common tool that has generally been adopted as the primary decision criteria in most policy
   analysis circles. Lave here is pushing back against the dominance of that culture,
   attempting to illustrate that BCA is not a perfect tool and attempting to specifically point out
   ways that it doesn’t reflect our values. What is Lester Lave’s real argument here? Is it an
   argument against benefit-cost analysis (BCA) or something more subtle? What is
   utilitarianism and how does this essay relate to it? What are the weaknesses of BCA? When
   should we use BCA (on what type of problems)? How should we interpret the output of a
   BCA?
4. Theory and Practice in Policy Analysis, Chapter 7 – Financial discounting is a common
   tool used in accounting to understand the time-value of money. We come across it any time
   we have to pay interest on a loan or make decisions between different types of investments.
   Just like some of the other topics in this class, this relatively simple and commonly-used tool
   has some hidden assumptions. While standard discounting works pretty well to help us
   make investment decisions, it is unclear if we can apply it to other topics like lives or what
   kind of a society to leave to our children. Some people argue that standard discounting is
   the right approach for almost any problem, but others argue that it leads to all sorts of
   outcomes that many people would find unethical.
   Questions to think about: In what situations is simple financial discounting appropriate?
   Is a “real options” perspective better? In what ways? Are discount rates constant? Should
   we use the same discount rate for different decisions, or are there situation-specific rates?
   Are things more remote spatially similar to those that are more remote temporally: does a
   “spatial discount rate” make sense? In general, what do you think of the applicability of
   discounting concepts?
   Practical Reading:
5. Herbohn and Harrison “Introduction to Discounted Cash Flow Analysis and Financial
   Functions in Excel” – This reading is a short and simple explanation of how net present
   value (discounting) calculation work and how to set them up in excel. This reading is
   technically optional, but will be useful for the homework assignment below.
   Week 1 Assignment (due 27 February)
   Question 1 (40 points), write a high-quality essay, approximately 1 single spaced page:
   The four conceptual readings in the first week describe a rational, analytical approach to
   evaluating decisions, policies, or other changes, usually in terms of monetary value (there are
   different tools and methods discussed, but they all fall under a perspective that is rational,
   quantitative, and based on the idea of utility maximization). In this first essay, write a short essay
   describing what you see as the strengths and weaknesses of this analytical perspective. This may
   include theoretical elements (like how ethical the approach is) or practical elements (like whether
   the approach can be applied to real-life questions). Please reference the readings and any outside
   sources you want in this essay.
   If you aren’t sure what to write about, here are some questions to consider (but are not
   required in the essay): Is this analytical perspective better than a purely political process for
   making decisions? How can this perspective be brought into government decision making? In your
   view, are these types of analysis worth doing? Are they always worth doing, or are there certain
   topics where they make the most sense? Are there situations where we don’t want or need these
   tools to help us make decisions? In the end, governments and organizations need to make decisions
   and take action – how should we make those decisions?
   Question 2 (20 points), only need to answer the questions, short sentences are fine:
   Consider a risk-free investment that costs $10,000 in year 0 and pays back 3 payments of
   $4,000 in years 1,2, and 3.
   a. What are the net benefits of the investment in direct (not discounted) terms?
   b. What are the discounted net benefits if my discount rate is 5%?
   c. What are the discounted net benefits if my discount rate is 25%?
   Question 3 (40 points), only need to answer the question, can be tables copied from excel
   and a few sentences:
   I want you to practice setting up a discounted cash flow and calculating NPV in excel. For this, I
   want you to estimate and compare the net present cost of a hybrid car (Toyota Prius C) and a
   similar regular car (Toyota Yaris). These are both small cars targeted at the economy buyer, but the
   Prius C costs more. However, of course, it saves fuel and might be a better option in the long run.
   For this problem, use these values for your base-case analysis (assume all costs are in real dollars
   and are constant over time):
   Parameter Value
   Prius C cost $19,500
   Yaris cost $14,800
   Gasoline cost $2.50 / gal
   Prius C fuel efficiency 49 MPG
   Yaris fuel efficiency 33 MPG
   Annual mileage 12,000 miles
   Lifetime of car 15 years
   Discount rate 7%
   For this analysis, you can disregard other factors (like maintenance costs or taxes) and just
   assume that the only costs are the upfront cost of the car and the fuel cost. For simplicity, assume
   you will just pay cash for the car and that you will drive it for 15 years, after which it will have no
   salvage value at all. Assume that the car is purchased in “year 0” and that the fuel expenses occur
   between “year 1” and “year 15”.
   On this question, you can just paste your excel tables in as an answer, with short sentences
   where needed (ie, a carefully written report is NOT required).
   a. For the Prius C, set up the (not discounted) cash flow for years 0 to 15 in one column. In the
   next column, apply discounting to the cost of ownership in each year (0 through 15), showing the
   discounted cash flow. Then sum it up to get the net present cost (NPC) of buying and operating the
   vehicle for 15 years.
   b. Next, do the same thing for the Yaris in the next few columns. Remember, good practice is to
   label your columns carefully (it helps you to remember exactly what each thing is).
   c. In another cell on your sheet, take the difference between the two NPC values from above.
   Which is cheaper and by how much?
   d. Now do a little sensitivity analysis. Which is the better choice (and by how much) if a
   consumer’s discount rate is 25%? At what gas price do the two options have the same NPC? If you
   set up your excel model correctly (with inputs typed in their own section and the main model
   referencing those cells), these should be easy to determine.