A Simple Cost-Benefit Rule
In this chapter we sum up the theoretical cost-benefit rules underlying the empirical evaluations. They are sprung out of a general equilibrium model of a small open economy. The more formal and detailed derivations are contained in an Appendix to the book. The special feature of the project under consideration is that it involves a private (reasonably) profit-maximizing multinational firm in part owned by foreigners. At first glance, the scenario seems inexpensive to Swedes, because a large fraction of the owners are not part of the Swedish society. We show how to handle this complexity. There are also many other technical complications to handle. For example, there are unit electricity taxes, electricity certificates requiring consumers to buy a proportion of their electricity from renewable sources, value added taxes, and so on. Transmission of electricity is a natural monopoly in each region since there is just a single cable linking the consumer to the provider and providers typically face increasing returns to scale (falling average costs). We discuss how to handle this structure in a social cost-benefit analysis when the provider is allowed to use two-part tariffs (fixed and variable tariffs) and face a break-even constraint. Finally, we briefly discuss a few aspects of the problem, such as distributional consequences, that are extremely complicated to estimate when evaluating a hypothetical project. For a hypothetical project it is not obvious who ultimately pays the costs of the project.