Glossary
| Average Cost | Total production cost divided by the number of units produced. |
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| Benefit | An economic benefit is any gain in the welfare of society (or the individuals that comprise it) from the proposal being considered. |
| Benefit-Cost Ratio | An alternative decision criterion. The BC ratio is given by: BC = sum of present values of benefits (cash inflows) ÷ sum of present values of costs (cash outflows) |
| Capital Charge | A financing charge designed to convey the cost of capital and encourage the best use of capital by government departments. |
| Competitive Neutrality | Competitive neutrality means that government activities do not enjoy net competitive advantages over potential private sector competitors by virtue of their public sector ownership. If competitive neutrality does not exist then resources may not be being put to their best use. |
| Consumer Surplus | Consumer surplus measures the difference between what a person is willing to pay for a commodity and the amount he/she actually is required to pay. |
| Cost | Economic costs relate to actual resource use in the economy and reflect the best alternative uses that the resources could be put to (i.e. they are opportunity costs). |
| Cost Benefit Analysis (CBA) | A systematic process for identifying and assessing all (both direct and indirect) costs and benefits of a proposal. All costs and benefits are assigned a money value, allowing the calculation of the net benefits of different proposals as a basis for evaluating alternatives. |
| Cost Effectiveness Analysis (CEA) | CEA compares the costs of alternative ways of producing the same or similar outputs/benefits. It is often used to find the option that meets a predefined objective at a minimum cost. |
| Cost Utility Analysis (CUA) | CUA is a variant of CEA that measures the relative effectiveness of alternative interventions in achieving two or more given objectives. |
| Deadweight loss (DWL) | The net cost to society attributable to a move away from an economy’s competitive equilibrium. |
| Depreciation | An accounting allowance that recognises that assets wear out and/or become obsolete by spreading purchase costs over the useful life of the assets. |
| Discount Rate | Effectively a desired return, or the return that an investor would expect to receive on some other typical proposal of equal risk. The discount rate seeks to capture the sum of:
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| Externalities | Benefits received or costs borne by those not associated with the activity and for which payment is neither given nor received. |
| Hedonic pricing | A technique for quantifying intangibles that uses the different characteristics of a traded good to estimate the value of a non-traded good. |
| Intangibles | Costs or benefits that are not easily quantified in monetary terms. |
| IRR (Internal Rate of Return) | The discount rate which results in a Net Present Value equal to zero. |
| Marginal Cost | The increase in total cost that results from carrying out one additional unit of activity. |
| Monte Carlo Analysis | A risk modelling technique that uses statistical sampling and probability distributions to simulate the effects of uncertain variables on model outcomes. |
| Multi-Criteria Analysis | A tool for appraising and ranking alternative policy options against a given set of objectives and criteria. It often includes both quantitative and qualitative variables. |
| Net Present Value (NPV) | The sum of discounted net cashflows over the appraisal period. |
| Opportunity Cost | The cost of the next best opportunity that has to be forgone if the opportunity under consideration is pursued. |
| Optimism Bias | The demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters, including capital costs, operating costs, works duration and benefits delivery. [62] |
| Payback Period | A method that determines the point in time at which cumulative net cashflows exceed zero. |
| Risk | The chance of something happening that will have an impact upon objectives. It is measured in terms of consequences and likelihood. The amount of risk associated with a future uncertain event can be estimated by the formula: Risk = P × L Where:
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| Sensitivity Analysis | An examination of how the result of a calculation or model varies as individual assumptions are changed. |
| Scenario Analysis | A simple form of sensitivity analysis that models risk/uncertainty under several sets of assumptions about key variables. |
| Sunk Cost | A cost that is beyond recovery at the point a decision must be made. |
| Transfer payments | Payments for which no good or service is obtained in return e.g. a social welfare benefit. |
| Travel Cost Analysis | A technique for quantifying intangibles that uses the value of traded goods and services (in this case the sum of travel costs necessary to reach a destination) to estimate the value of non-traded goods. |
| Utility | A measure of the satisfaction or welfare gained or lost from a particular activity. |
Notes
- [61]Ministry of Economic Development. (1999). A Guide to Preparing Regulatory Impact Statements. http://www.med.govt.nz/buslt/compliance/risbccs/regimpact/index.html
- [62]UK Green Book glossary, http://greenbook.treasury.gov.uk/glossary.htm.
- [63]AS/NZS 4360:1999 Australian/New Zealand Standard “Risk Management”, http://www.standards.co.nz/default.htm.
