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Public SectorEconomics

Lecture 9: Regulation and Policy EvaluationDr Alex Robson

Griffith University

2013

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Outline of Todays

Lecture The Coase Theorem

The costs and benefits of regulation

Regulatory governance processes

The importance of ex-ante and ex-post policyevaluation

Cost-benefit analysis

Common errors and fallacies in cost benefit

analysis

Discounting costs and benefits over time

Risky projects

Applications include the National Broadband Network

and climate change policy.

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The Coase Theorem

We have examined Pigouvian taxes,

which are one possible way of

mitigating the efficiency costs thatmay be associated with negative

externalities.

But such taxes may not be necessary if

there are well defined legal rules andtransaction costs are low

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Example: Loud Musicas a Negative

Externality1

Loud MusicMB2

Absence ofLoud Music

MB

1byPlayed

MusicLoud

2byEnjoyed

MusicLoudofAbsence

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Efficient Amount of

Loud Music

*m

1

Loud MusicMB2

Absence ofLoud Music

MB

1

Loud MusicMB2

Absence ofLoud Music

MB

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Legal Rules

*m

Regime I

Regime II

1

Loud MusicMB2

Absence ofLoud Music

MB

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If Person 2 has the Legal Right toStop Person 1 From Playing

Music If bargaining costs (also known as transaction costs) are small, then

there will be gains from trading the right to play loud music.

Individuals will trade as long as there are gains from doing so.

If there are no transaction costs, they would trade until they reached

m*, the efficient amount of loud music.

*m

1

Loud MusicMB2

Absence ofLoud Music

MBPerson 1 iswilling to pay

this amount to

play a bit of loud

music

Person 2 is

willing to accept

this amount as

compensation

for putting up

with a bit of loud

music

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If Person 1 has the LegalRight to Play as Much Loud

Music as they Wish

*m

1

Loud MusicMB2

Absence ofLoud Music

MBPerson 2 iswilling to pay

this amount to

stop 1 playing

some loud music

Person 1 is

willing to accept

this amount as

compensation

for giving up a

bit of loud music

If bargaining costs (also known as transaction costs) are small, then

there will be gains from trading the right to play loud music.

Individuals will trade as long as there are gains from doing so.

If there are no transaction costs, they would trade until they reached

m*, the efficient amount of loud music.

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Coase Theorem and

Implications If legal rights are well defined and transaction costs aresmall, then parties will trade until the efficient amount of the

externality-generating activity is produced.

The efficiency properties of the final outcome does not

depend on the structure of the legal rule, as long as somelegal rule is in place

Legal rules affect distribution but not efficiency

Implications:

There may be market solutions to the ineff iciencies

caused by externaliti es (eg mergers)

I f transaction costs are low, there is no need for

Pigouvian taxes!

If transaction costs are low, then legal rules dont

matter for economic eff iciencyas long as some legal

rule is in place!

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High Transaction

Costs But in most instances, transaction

costs are unlikely to be low.

If transaction costs are high, then legalrules will affect economic efficiency

Some legal rules will be better than

others

Legal rules may be better than

Pigouvian taxes

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Regulation

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Volume of Regulation

in Australia

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Costs and Benefits of

Regulation Regulations have both benefits and costs. Whilst appropriately designed regulations can help define property rights and clarify

the rules of the game for market interactions (and thereby boost productivity), poorly

designed regulations can have the opposite effect.

Poorly designed regulationswhich are more likely to be put in place in the absence

of robust regulatory governance processes - can entrench and exacerbate the effects ofinefficient management and workplace practices, reward poor managerial ability, and

discourage entrepreneurship.

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Productivity

Broadly speaking, productivity can be defined as the amount

of output produced per unit of inputs.

Productivity can be measured for specific kinds of inputs

(such as labour and capital), resulting in estimates of labour

productivity and capital productivity respectively; or it can

be measured for combinations of inputs.

Hence, there are three primary measures of productivity that

are commonly used:

Labour Productivity: The amount of output produced per unit

of labour input; Capital Productivity: The amount of output produced per unit

of capital input; and

Total Factor Productivity (TFP): The amount of output

produced per unit of a mix of inputs

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Measures ofProductivity in

Australia

0

20

40

60

80

100

120

140

160

180

200

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Index(

1985-86=10

0)

Year

Capital Productivity

Labour Productivity

Total Factor Productivity (TFP)

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Total Factor

Productivity

0

50

100

150

200

250

1985-86

1986-87

1987-88

1988-89

1989-90

1990-91

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1998-99

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

Index(

1985-86=10

0)

Year

Gross Value Added

Index of Combined Labour and Capital Inputs

Total Factor Productivity (=GVA/Index of Com bined Inpu ts)

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Contributions toAustralias Economic

Growth

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Interpretations of

TFP Growth Technological Change: TFP improvements come about as

a result of enhancements in technology or knowledge, thatare not directly embodied in measures of labour and capitalinputs.

Positive Economic Spillovers and Scale Effects: TFP

improvements come about as a result of positive externaleconomic effects or spillovers between inputs, which arenot captured in the payments that are made to these factors.For example, education may have positive spillovers acrossthe economy which are not directly captured in higher realwages. Alternatively, TFP improvements come about as aresult of increases in the scale of production, which spread

fixed costs across greater volumes and therefore result inlower unit costs.

Better Ways of Organising Production: TFPimprovements come about as a result of better combiningexisting inputs, so that more output can be produced withthe same product mix.

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Causes of TFP

Growth Expenditure on research and development;

Education and investment in human capital;

Infrastructure and public investment; Competition and regulation (eg labour

market regulation);

International trade and openness;

Organisational structures, workplaceflexibility, managerial ability,

entrepreneurship and managerial practices.

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Economic Effects of a Reductionin Productivity due toInappropriate Regulation

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Regulation Taskforce

(2006) The Regulation Taskforce identified five features of regulations that contribute

to government failure, generating compliance burdens on business and which arenot justified by the intent of the regulation:

Excessive coverage, including regulatory creepRegulations that appearto influence more activity than originally intended or warranted, or where thereach of regulation impacting on business, including smaller businesses, hasbecome more extensive over time.

Regulation that is redundantSome regulations could have becomeineffective or unnecessary as circumstances have changed over time.

Excessive reporting or recording requirementsCompanies face multipledemands from different arms of government for similar information, as well asinformation demands that are excessive or unnecessary. These are rarelycoordinated and often duplicative.

Variation in definitions and reporting requirementsRegulatory variationof this nature can generate confusion and extra work for businesses than wouldotherwise be the case.

Inconsistent and overlapping regulatory requirementsRegulatoryrequirements that are inconsistently applied, or overlap with other requirements,either within governments, or across jurisdictions. These sources of burdenparticularly affect businesses that operate on a national basis.

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Regulatory GovernanceProcesses and Best

Practice Regulation Although the costs of regulation to businesses and consumers are a

function of existing regulations, the focus of regulatory governancein Australia has been on improving the flow of regulation.

Regulatory flows eventually become part of the stock of regulation,and can often be a substantial component of it. In most cases, themost opportune time to examine a new regulation is when it isbeing introduced.

It is often easier to identify and prevent a poor regulation being putinto place than to abolish an existing regulation. Furthermore, if it isnot possible to improve the regulation making process, then it isunlikely that processes which attempt to improve the existing stockof regulation will succeed.

Reviews of the existing stock of regulation - will become more

difficult, time-consuming and costly if the inflow of inappropriateregulation is not controlled.

Regulatory governance processes are therefore a criticaldeterminant of the size and composition of the stock of regulation.Todays new regulation becomes tomorrows costs to businessesand consumers. If annual regulatory flows are large, this will tendto rapidly increase the stock.

It is therefore vital to understand Australias regulatory governance

processes, how they have performed, and how they can beimproved.

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Regulatory GovernanceProcesses and Best

Practice Regulation Regulatory governance processes can

perform a valuable gatekeeper role,

controlling and reducing the inflow ofregulation.

However, if the gatekeeper role is not

performed adequately, the stock of

poorly designed regulations willcontinue to grow.

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Ex-Ante PolicyEvaluation: Regulatory

Impact Assessments The purpose of Australias Regulatory Impact Assessment (RIA)

process is to communicate information about the expected effects ofregulatory proposals to inform political decision makers on whetherand how to regulate.

A Regulatory Impact Statement (RIS) sets out the problem theregulation addresses, the regulations objectives, different optionsto achieve them, an assessment of the impacts of each option, theconsultation undertaken and recommends an option (usually the onewith the greatest net benefit).

Assessing the impact of each option could include estimating thecosts and benefits, measuring business compliance costs, analysingrisks and considering the effects on competition.

The RIA process aims to make regulation more efficient and

effective by having its designers justify the reasons forimplementing a new regulation, consider the costs and benefits ofdifferent options at an early stage and take a community-wideperspective of their effects, to help ensure that the benefits tosociety (broadly conceived) of a regulation are greater than thecosts (also broadly conceived) and to encourage the design andadoption of the regulation with the greatest net benefit.

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Brief History of RIA

processes in Australia Australia was an early adopter of RIA processes. From 1985,

Cabinet required that regulatory proposals with significant effectson business include a RIS.

In 1986, the Hawke Government established the Office ofRegulation Review (ORR) to encourage good regulatory practice.

Since then, every inquiry in Australia into how to reduce theregulatory burden at the Federal level has recommendedstrengthening RIA requirements and increasing the ORRsresources and gatekeeper role.

In 1995, RIA was extended to cover the development of all nationalstandards.

In 2009, all Australian states and territories had their ownindividual RIA processes to cover state government regulations.

Yet, overall, the results of RIA requirements have beendisappointing.

Prior to 1997, the RIA requirements were widely ignored. Forexample, in 1996-97 out of 121 Bills that required the preparationof a RIS, departments only did so in 13 cases, and only 10 (8 percent) were fully compliant.84 There were no effective sanctions,and this led to low levels of compliance.

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Brief History of RIA

processes in Australia Even after the RIS requirements were

strengthened in March 1997, following thenew Howard Governments Bell Review, theonly penalty for non-compliance was to haveit pointed out in the ORRs annual report ayear later.

Nonetheless, compliance did improve,averaging 74 per cent from 1997-2005,indicating that at least some RISs were being

completed. However, compliance has been weaker for

the more significant regulations and for thosethat are more politically sensitive.

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Best PracticeRegulatory Analysis

1. I dentifi cation of the Problem

2. Explain Objective

3. I dentify a Range of Options (list of options

must include doing nothing)4. Impact Analysisassess costs and

benef its, relative to counterfactual (thismay not be the status quo). Conductsensitivity analysis.

5. Consul tation6. Conclusion and Recommended Option

benef its should exceed costs

7. Implementation and Review

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Cost Benefit Analysis(CBA)

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Cost Benefit Analysis

What is it?

Application of the conventional tools

of microeconomics to government

policies and projects It is what we have been doing in this

course

Why do it?

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Why do CBA? Robust assessments of the costs and benefits

of regulations can reduce uncertainty aboutthe overall effects of individual regulations,thereby lowering the probability of costly

policy errors, and increasing the chances that

regulations that are passed will actually resultin net benefits to the community.

Furthermore, rigorous assessment processescan help weed out regulations that are likelyto result in net economic costs.

In other words, a robust regulatoryassessment process can reduce both types oferrors.

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Why do CBA?

The analytical framework developed by Little andMirrlees (1994) can be used to quantify the gains fromcost benefit analysis.

In the context of regulatory governance, there are two

possible errors that can be made: Type I error: an appropriate regulation is rejected

because it is not assessed at all, or because it isincorrectly assessed as creating net welfare losses;and

Type II error: an inappropriate regulation is

passed, either because it is not assessed at all, orbecause it is incorrectly assessed as creating netwelfare gains.

Robust governance processes can reduce theprobability of both types of errors.

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Why do CBA?

Since the costs of undertaking regulatory impactassessments are usually small relative to the welfareeffects of regulation, a good economic case can bemade for performing rigorous cost benefit analysis andundertaking robust regulatory impact statementseven where the reduction in the probability of bothkinds of errors that is produced is relatively small.

The Little-Mirrlees analysis also shows theimportance of not excluding options from regulatoryimpact assessments and cost benefit analyses. If one ormore options is excluded, this magnifies the

probability of both kinds of error being made, and somagnifies the welfare losses of poor regulation, aswell as the gains that are foregone when appropriateregulations are not passed.

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Common Errors in

Cost Benefit Analysis Counting costs as benefits

Double counting

Wider Economic Benefits andmultipliers

Inappropriate choice of discount rate,

which is used to compare future costs

incurred and future benefits to todays

dollars

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Discounting Costs and

Benefits Over Time

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Discounting and

Present Values Most CBAs involve weighing up costs that

are incurred today versus benefits that will be

obtained in the future

Examples: large capital intensive

infrastructure projects such as roads,

railways, electricity networks etc.

We need a way of comparing future income

or consumption streams to the costs that willbe incurred today.

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Present Value Consider the following two possibilities:

Receive $1 tomorrow; OR

Receive $x today

What must x be for these two income streams to be equivalent?

Suppose the discount rate or interest rate is r. Since $x invested today will

yield $x(1+r) tomorrow, we can set $1 = $x(1+r) and solve for x to get:

$x= $1/(1+r)

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Present Value Converting future income or consumption streams to present values gives

us a consistent way of comparing future income streams with each other.

For example, what is preferable: $x received next year, or $y received in

twoyears time?

To answer, we just find the present value of each income stream.

We compare $x/(1+r) with $y/(1+r)2

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Social Discount Rate

What discount rate should be used inevaluating government policies?

How much should society be willingto give up today in order to obtain

benefits tomorrow? In other words,what is thesocialdiscount rate?

Two approaches:

Ethical approach

Market approach

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Social Discount Rate:

Ethical Approach Suppose that someone offered you the following deal: all

else being equal, why dont you give up $1/(1+) today inorder to receive one dollar tomorrow?

What would have to be for you to remain just as well offafter accepting this deal? The answer is that it depends on

how impatient you are. If you are not impatient at all, then you would be willing to

give up one dollar today to get one dollar tomorrowin thatcase, would be 0.

On the other hand, if you were highly impatient, you wouldnot be willing to give up any dollars today in order toreceive one dollar tomorrowand would be infinite.

The term is known as thepure rate of time preference. It simply reflects the willingness of an individual to give up

1/(1+) units of consumption today in order to receive onedollar worth of consumption tomorrow.

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Social Discount Rate: EthicalApproach Allowing for Future

Economic Growth Future generations will be richer than usthey will be able

to produce more.

So in addition to making a judgement regarding the purerate of social time preference, we also need to account forthe fact that a cost incurred by us today will benefit someone

much richer than ourselves. Denote the annual growth rate in production and

consumption isg.

What is this growth worth in utility terms? In general, eachadditional unit of consumption worth less than the previousunit (declining marginal utility of consumption).

So we need to make an assumption about how utilityresponds to consumption. This is the elasticity of themarginal utility of consumption, denoted by (eta).

Multiplying andgtogether gives total the utility gain from1 per cent higher consumption.

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Social Discount Rate: EthicalApproach Allowing for Future

Economic Growth So we are now in a position to work out how much

society should give up in order to get extraconsumption tomorrow.

If there was no economic growth, this decision would

be easy: we could simply focus on the value of theutility discount factor, compounded continuously overthe next 100 years.

But there is likely to be economic growth.

And so the answer to our ethical question depends on

this growth rate as well as our degree of impatience. Adding together the two factors above, we get:

Social discount rate = +g

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Example: Stern Reporton Climate Change

Stern assumes that =0.1, which means that he thinks thatall else being equal, society should be willing to give up1/(1.001) = 0.999001 dollars today in order to receive onedollar tomorrow.

Stern assumes thatgis 1.3 per cent.

Stern assumes that =1, which means he assumes that eachadditional percentage gain in consumption yields a 1 percent gain in utility.

Multiplying andgtogether gives total the utility gain from1 per cent higher consumption.

So Stern arrives at a figure for g of 1.3 per cent.

Adding together the two factors above, we get:

Sterns social discount rate = +g

=0.1+1.3

=1.4 per cent.

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Example: Stern Reporton Climate Change

Individuals in a free market will trade until there areno more gains from doing so.

If an entire economy is to be in equilibrium, there canbe no remaining gains from trade. That means that it

must be the case that 1+r= 1+ +g in equilibrium. So Sterns ethical judgment means that 1+r=1+ +g

=1+1.4, or r=1.4.

In other words, Stern is effectively assuming a marketreal interest rate of 1.4 per cent.

Most economists think that is unreasonably low.That is one reason why Stern has been so hotlydebated.

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Risk and Cost BenefitAnalysis

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Risk and the Discount

Rate When future benefits and costs areuncertain, the discount rate mustinclude an adjustment for risk.

We now use expected costs andexpected benefits, and use a modifieddiscount factor

The appropriate discount factor is

now: 1

1 risk premiumr

where r is the risk free rate of return (eg

long term government bond rate)

Ri k d U t i t

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Risk and Uncertainty

The general rule is that risky assets need to pay ahigher expected return than the risk free rate, in orderto compensate people for bearing the greater amountof risk than is embodied in the risk free asset.

Those holding risky assets must be paid a risk

premium order to be willing to hold them. But what kind of risk is relevant? And what exactly

is the risk premium equal to?

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Risk and Uncertainty

Distinguish two types of risk: market risk and idiosyncraticrisk.

The former is related to the market as a whole, whereas thelatter is specific to particular assets.

Key Point 1: Only the market ri skreceives a risk premium.

In a well diversified portfolio, idiosyncratic risk can becompletely diversified away.

Suppose that you have wealth of $1 and form a portfolio ofn risky assets. The expected return of each asset is $r, andeach has a variance of2

Suppose you invest an equal fraction of your wealth in eachasset.

Then your expected return on each asset is (1/n) r = r/n,and the variance of each asset is Var[(1/n) 2 ]= 2/n2. Sothe total variance is n 2/n2 = 2/n < 2.

Diversification reduces the variance of your portfolio butnot its expected return.

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The Price of Market Risk Suppose that you invest a fraction 1-x of your wealth in a riskless asset,

and a fraction x in a large, well diversified mutual fund that buys all ofthe risky assets in the economy.

Let rbethe risk free rate, rm the expected return on the market mutualfund, and m

2 the variance of the market mutual fund.

The only risk in this mutual fund is the risk of the market as a wholethe macroeconomic or aggregate risk. All idiosyncratic risk has been

diversified away. Lets find the opportunity cost or price of this aggregate/

market/macroeconomic risk.

The variance of the portfolio isx2m2, the standard deviation isxm

andthe expected return is (1-x)r+ xrm

Higher expected returns can be achieved by increasing x, but theopportunity cost of this is higher risk.

Th P i f

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If x = 0, then the expected return is r

and the standard deviation is 0.

If x =1, then the expected return is rmand the standard deviation is m

For values in between, the expected

return is (1-x)r + xrm= r + x(rm-r) and

the standard deviation is xm

The Price ofMacroeconomic or

Market Risk

Risk-Return Possibilities

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Risk Return PossibilitiesCurve

Standard Deviation

of Return

Expected Return

Slope = Opportunity Cost

of Lower Risk=Compensation

for Higher Risk

r

( )m

x r r

mx

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The compensation for bearing an

additional amount of pure market or

macroeconomic risk is the slope of this

line, which is:

(rm-r)/ m

This must be the market price of

macroeconomic risk.

The Market Price of Risk

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Now consider any other asset, call it asset j. Suppose that its expectedreturn is r

jand suppose that its variance is

j

2.

Key Point 2: It turns out that the overall variance of asset j is notwhatmatters in determining the risk premium for an asset, since part of thisvolatility or risk can be diversified away by holding the market mutualfund.

The only thing that is relevant is the relative riskiness of asset j,

compared to the market as a whole - or the extent to which asset jsreturns are correlated with the overall market return

Let j be the riskiness of asset j, relative to the market as a whole.

Ifj =0, then movements in returns of asset j are, on average,completely unrelated to the overall market.

Ifj

=1, then movements in returns of asset j are, on average, thesame in percentage terms as the overall market.

The Market Price of Risk

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The Market Price ofRisk The total risk of asset j is its relative riskiness,

multiplied by the total market risk:

Total risk of asset j = jm

The compensation or premium for bearing thisrisk is just the amount of risk, multiplied by themarket price of risk:

Risk premium = j

m p

= jm(rm-r)/ m

= j(rm-r)

The Capital Asset Pricing Model

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For any two assets a and b if we subtract their risk premiums fromtheir expected return, we must get the same expected return.

And the result must also be equal to the risk free interest rate:

ra - a(rm-r) = rb - b(rm-r) = r

So for any asset j, we must have:

rj= r+ j(rm-r)

This just says that the expected return on an asset is equal to the riskfree rate, plus a risk premium that is equal to the relative riskiness ofthat asset multiplied by the market price of risk.

This equation is known as the Capital Asset Pr icing Model

The Capital Asset Pricing Model(CAPM)

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The CAPM

Intuitively, if an asset has a low , thenits returns are not highly correlated withthe rest of the market or the overalleconomy.

Such an asset is valuable for an investoron average, it provides high returns whenthe market is down, and low returns whenthe market is up.

Since it has this valuable property,investors dont need to be compensatedwith a high risk premium in order to bewilling to hold it.

Hence it has a low expected return in

equilibrium.

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The CAPM

The CAPM formula really is an asset pricingformula because we can rewrite it and expressit as a relationship between the current andexpected future price of an asset.

Suppose that the current price of the risky assetisPj , and that we expect the price of an assetto be Pj

e tomorrow.

Then the expected return is rj =Pej - Pj)/Pj

and the CAPM formula says that:

Or:(Pej- Pj)/Pj= r+j(rm-r)

1

e

j

j

j m

PP

r r r

The CAPM

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The CAPM This is a very useful formula. It says that the current

price of an asset is equal to its discounted expectedfuture price, where the discount rate that is applied is

the risk free rate plus the risk premium for the asset.

We can use this formula in a range of situationsnot

just for financial assets but for thinking about theappropriate rate of return on risky government

projects, as well as the economics of resource

scarcity, sustainability and maximising the value of

non-renewable resources for current and future

generations.

Sh ld U L

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Should we Use a LowerDiscount Rate for

Government Projects? If the government builds a project, this does

notreduce the projects risk it simply

transfers risk from the private sector to

taxpayers Therefore, in general we should not use a

lower discount rate for government projects,

since the economic risk characteristics of

(say) a road or railway do not change simplybecause the government decides to build it.

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CBA Example: The

National BroadbandNetwork (NBN)

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NBN announcement:April 2009

Formation of an Australian government company to build

and operate a fibre to the home (FTTH) network

Government will be the majority shareholder (at least 51%)of this new entity, being termed the NBN Company

Total network to cost up to $43 billion, with private sector

investment

Government will sell down initial ownership interest

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Proposed network

Fibre to the home providing broadband to urban and regional towns with

speeds of 100Mbps

Extends to towns of around 1000 or more people

Equates to 90% coverage versus 98% of previous fibre to the node proposal

Next generation wireless and satellite to deliver 12 Mbps to remaining

10%

Simultaneous deployment in urban, regional and rural areas

i i

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Just how big is theproposed NBN?

43.0

36.4

33.4

27.0

22.3

12.5

0

10

20

30

40

50

Broadband

network

Electricity

distribution

networks

Rail

infrastructure

Australian

listed

infrastructure

Telstra basic

copper

network

Electricity

transmission

Valueofassets-

$billions

I t ti l

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Internationalcomparison - funding

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%Government funding / telco revenue (LH axis)

Government funding / GDP (RH axis)

Singapore NZ GreeceKorea AustraliaUSJapan

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Cost Benefit Analysisof NBN?

The Government did not undertake a

CBA of the NBN

Ergas and Robson (2009) remains theonly publicly available cost-benefit

analysis of the NBN. http://pc.gov.au/__data/assets/pdf_file/0003/96213/08-

chapter6.pdf

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=14

65226

Cost Benefit Analysis

http://pc.gov.au/__data/assets/pdf_file/0003/96213/08-chapter6.pdfhttp://pc.gov.au/__data/assets/pdf_file/0003/96213/08-chapter6.pdfhttp://papers.ssrn.com/sol3/papers.cfm?abstract_id=1465226http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1465226http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1465226http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1465226http://pc.gov.au/__data/assets/pdf_file/0003/96213/08-chapter6.pdfhttp://pc.gov.au/__data/assets/pdf_file/0003/96213/08-chapter6.pdfhttp://pc.gov.au/__data/assets/pdf_file/0003/96213/08-chapter6.pdf

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Cost Benefit Analysisof NBN

Using an engineering model that builds costs up from exchange areas,

distinguished by population density, we model the deployment, operations

and maintenance costs of a Gigabit-capable Passive Optimal Network

(GPON) FTTH, offering 100 Mbps connectivity to 90% of the Australian

population.

We then construct three counterfactuals:1.Progressive upgrading of the current network, including upgrading of the

HFC cable;

2.Progressive upgrading of the current network, followed in 5 years time by

deployment of an FTTH (i.e. delayed start);

3.Deployment of a targeted FTTH, that provides 100+ Mbps to the right

hand tail of the distribution of WTP;and estimate the incremental costs of each scenario.

Our study found that in present value terms, the costs of the NBN

exceed its benefi ts by somewhere between $14 bil l ion and $20 bil l ion,

depending on the discount rate used.