492 ECONOMIC ANALYSIS IN THE PUBLIC SECTOR
Viewpoint for Analysis
When governmentalbodies do economic analysis, an important concern is the proper view-
point of the analysis. A look at industry will help to explain how the viewpoint,or perspec-
tive, from which an analysis is conducted influences the final recommendation.Economic
analysis, both governmental and industrial, must be based on a viewpoint. In the case of
industry the viewpointis obvious-a company in the private sector pays the costs and counts
itsbenefits.Thus, both the costs and benefits are measured from the perspectiveof the firm.
Costs and benefits that occur outside the firm are referred to as external consequences
(Figure 16-1).In years past, private-sector companies generally ignored the external conse-
quences of their actions. Ask anyone who has lived near a cement plant, a slaughterhouse,
or a steel mill about external consequences! More recently, government has forced indus-
try to reduce pollution and other undesirable external consequences, with the "resultthat
today many companies are evaluating the consequences of their action from a broader, or
community-oriented, viewpoint.D
Smoke
Stack
Internal
ConsequencesExternal
ConsequencesFIGURE 16-1 Internal and external consequences for an industrial plant.The council members of a small town that levies taxes can be expected to take the
"viewpoint of the town" in making decisions: unless it can be shown "that the money from
taxes can be usedeffectively,the town council is unlikely to spend it. But what happens when"
the money is contributed to the town by the federal government, as in "revenue sharing"
"or by means of some other federal grant? Often the federal government pays a share"of
project costs varying from 10 to 90%. Example 16-1 illustrates the viewpoint problem that
is created.A municipal project will cost $1 million. The federal government will pay 50% of the cost if the
project is undertaken. Although the original economic analysis showed that the PW of benefits
was $1:5 million, a subsequent detailed analysis by~the town engineer indicates a more'realistic
estimate of the PW of benefits is $750,000. The town council must decide whether to proceed
with the project. What would you advise? ;