We offer extensive expertise and innovative methods for economic impact and benefit-cost analysis. We provide economic analysis solutions to both private and public sector professionals looking to better understand the economic impacts and net benefits of a given industry, event, or policy in a region.
We can assist economic and public policy professionals working across a wide array of organizations who are tasked with estimating the economic effects of a variety of policy and management alternatives. For example, the National Environmental Policy Act (NEPA) requires that any action that uses federal resources must take into account both economic benefits of the resources and the economic impacts of decisions on regional economies. These efforts to quantify impacts and benefits are often obfuscated by misunderstandings and misuses of terminology on the part of the analyst, the client, and the public.
Economic impact analysis – such as those conducted by an input-output analysis -- estimates the amount of economic activity in a defined region attributable to a change in an industry, event or policy in that region. Economic activity is based on the flow of dollars through a regional economy and can be measured in several different units such as sales, jobs, or income. Economic impact analysis measures the amount of economic activity in the region that an industry, event, or policy can claim credit for and how that flow of dollars cycles though the local economy. As those dollars cycle through the economy they create jobs and income in the community before the money eventually leaks out of the community due to the need to buy goods from outside the region.
For example, tourists spend money in a community and this spending represents new money flowing into the local economy. Visitor spending enables businesses such as restaurants to operate—which in turn supports jobs and results in the corresponding wages paid to workers. Moreover, the employees at the restaurants then take their wages and spend them on other goods. Some of these goods, such as haircuts, are locally provided. The barbers’ sales, jobs, and wages can then be traced back to the money brought in by the park visitors, even if no park visitors ever get a haircut while visiting the region. The tourist spending represents the injection of new money into the region and the effect on the barbershops is part of what is called the “multiplier effect”. This is what is measured in an economic impact analysis.
Economic benefits -- such as what is calculated in a benefit-cost analysis -- measure a very different thing than do economic impacts. An economic benefit measures how much value people derive above what they have to give up to get those things. For example, the benefit of visiting a tourist attraction can be directly measured by the amount that people are willing to pay to visit the site (including the transportation costs) above and beyond what they actually have to pay. These benefits can be either marked or nonmarket base benefits.
More directly, consumers receive benefits from directly consuming or expensing a given good. When there is not a significant market failure associated with a given good, then the first law of welfare economics states that free markets will allocate resources in an optimal manner as to maximize the total benefits to society. Furthermore, under the assumption of no market failures, then prices are perfect reflections of society’s values. The fact that a consumer chooses to spend their money on a given good means that they value that good at least as much as they value the other ways that they could have spent that money. Using economic analysis, the amount that consumers are willing to pay to for a good can be calculated and compared to the amount that they actually spent to visit the attraction. The difference between what the consumers are willing to pay to for the good and what they actually must pay to get it is referred to as “consumer surplus” and is a measure of the economic net benefit.
Of course there are many market failures associated with the production and consumption of almost all goods. The market failure may be minor or it may be significant. When there are significant market failures associated with the deviation between the market outcome and the socially optimal outcome must be taken into account to obtain the true direct use benefits associated with a given good. These direct use benefits, along with the aforementioned non-use values such as existence, option, and bequest values, can then be incorporated into a benefit-cost analysis.
It is important to know both the economic impacts and the net benefits associated with a given industry, event, or policy and the two measures should be thought of as complimentary, not substitutes or additive measures.