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Cost-Benefit Analysis of Multi-Level Government

Cost-Benefit Analysis of Multi-Level Government. Gareth D. Myles University of Exeter. Overview. The book advances the theory of cost benefit in directions beneficial for EU policy It builds on the best of current theory

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Cost-Benefit Analysis of Multi-Level Government

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  1. Cost-Benefit Analysis of Multi-Level Government Gareth D. Myles University of Exeter

  2. Overview • The book advances the theory of cost benefit in directions beneficial for EU policy • It builds on the best of current theory • The analysis is developed from a perspective that is informed by practice • These features make it a valuable contribution in the tradition of manuals on cost-benefit analysis

  3. The Background • Every government has limited resources to spend on public projects • This forces the selection of a limited set of projects • The correct choice will ensure the increase in welfare is maximised • This can only be achieved if the resources used are correctly valued

  4. The Background • Cost-benefit analysis was formalised in the 70s alongside the re-emergence of welfare economics • A definitive statement was provided in the Drèze and Stern survey • Their model could incorporate a range of policy variables (or signals) and side constraints • They emphasised the joint determination of shadow prices and optimal policies

  5. Contribution • How can the book add to this literature? • The economic and political environment continues to evolve • The development of the EU has changed the institutional setting • New objectives have been set for policy • The modelling techniques used in economics have advanced

  6. Contribution • The structure of the EU involves multi-level government • The objectives of the EU include income equality across regions • The Lisbon process has emphasised the importance of sustainable growth • And the internal structure of the policy problem has changed (budget set first then allocated)

  7. Contribution • The book develops the theory to accommodate these developments • It develops policy analysis for the new ordering • The analysis explicitly models multi-level government • It also incorporates the political economy of policy choice • And acknowledges bargaining over policy

  8. Key Developments • The book successfully constructs an explicit model for median voter choice • This can be embedded within the cost-benefit model • It can also be linked to the central government concern for regional inequality • It also presents a insightful model of the bargaining problem between centre and region

  9. Further Directions • Like any good contribution the book opens avenues for future research • Three of these will be briefly discussed • First, the strategic relationship between regions and the centre • Second, the incorporation of cost-benefit analysis in models of economic growth • Third, the economic analysis of voting

  10. Further Directions • The book models regions as bargaining with centre • It also considers the allocation of a fixed level of expenditure • Regions could be represented as acting more strategically • This might be significant if the problem is expanded to raising revenue as well as allocating expenditure

  11. Further Directions • Expenditure will be made in the region where marginal benefit is highest • Revenue will be raised where marginal cost is lowest • This raises questions of political economy • Also conjecture that there could be an incentive for a region to deliberately choose a poor tax structure • Incentive compatibility becomes an issue

  12. Further Directions • The Drèze and Stern model is essentially static • There is a need to extend cost-benefit analysis to address issues of economic growth • This raises numerous questions about the modelling of growth paths • And the transition between balanced growth paths

  13. Further Directions • Economics lacks an adequate model of political processes • The median voter model only works in restricted circumstances • The analysis of voting faces a conflict between the implications of rationality and observed outcomes • This is a difficulty for all study of political economy

  14. Closing Remarks • Wish offer thanks for allowing me this opportunity to comment on this book • And provide congratulations for what has been achieved • The book will inform my own future work on these issues • I look forward to the future developments that are now possible

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