Public Sector

Economics
Lecture 9: Regulation and Policy Evaluation
Dr Alex Robson
Griffith University
2013
Outline of Todays
Lecture
The Coase Theorem
The costs and benefits of regulation
Regulatory governance processes
The importance of ex-ante and ex-post policy
evaluation
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.
The Coase Theorem
We have examined Pigouvian taxes,
which are one possible way of
mitigating the efficiency costs that
may be associated with negative
externalities.
But such taxes may not be necessary if
there are well defined legal rules and
transaction costs are low
Example: Loud Music
as a Negative
Externality
1
Loud Music
MB
2
Absence of
Loud Music
MB
1 by Played
Music Loud
2 by Enjoyed
Music Loud of Absence
Efficient Amount of
Loud Music
* m
1
Loud Music
MB
2
Absence of
Loud Music
MB
1
Loud Music
MB
2
Absence of
Loud Music
MB
Legal Rules
* m
Regime I
Regime II
1
Loud Music
MB
2
Absence of
Loud Music
MB
If Person 2 has the Legal Right to
Stop 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 Music
MB
2
Absence of
Loud Music
MB
Person 1 is
willing 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
If Person 1 has the Legal
Right to Play as Much Loud
Music as they Wish
* m
1
Loud Music
MB
2
Absence of
Loud Music
MB
Person 2 is
willing 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.
Coase Theorem and
Implications
If legal rights are well defined and transaction costs are
small, 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 some
legal rule is in place
Legal rules affect distribution but not efficiency
I mplications:
There may be market solutions to the inefficiencies
caused by externalities (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 efficiency as long as some legal
rule is in place!
High Transaction
Costs
But in most instances, transaction
costs are unlikely to be low.
If transaction costs are high, then legal
rules will affect economic efficiency
Some legal rules will be better than
others
Legal rules may be better than
Pigouvian taxes
Regulation
Volume of Regulation
in Australia
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 regulations which are more likely to be put in place in the absence
of robust regulatory governance processes - can entrench and exacerbate the effects of
inefficient management and workplace practices, reward poor managerial ability, and
discourage entrepreneurship.
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

Measures of
Productivity in
Australia
0
20
40
60
80
100
120
140
160
180
200
1
9
8
5
-
8
6
1
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-
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1
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1
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1
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0
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1
1
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1
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1
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-
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1
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-
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1
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-
0
0
2
0
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1
2
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1
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2
2
0
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2
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6
2
0
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2
0
0
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8
2
0
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1
0
2
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1
0
-
1
1
I
n
d
e
x

(
1
9
8
5
-
8
6
=
1
0
0
)
Year
Capital Productivity
Labour Productivity
Total Factor Productivity (TFP)
Total Factor
Productivity
0
50
100
150
200
250
1
9
8
5
-
8
6
1
9
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-
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1
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0
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0
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1
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2
0
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0
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1
0
-
1
1
I
n
d
e
x

(
1
9
8
5
-
8
6
=
1
0
0
)
Year
Gross Value Added
Index of Combined Labour and Capital Inputs
Total Factor Productivity (=GVA/Index of Combined Inputs)
Contributions to
Australias Economic
Growth
Interpretations of
TFP Growth
Technological Change: TFP improvements come about as
a result of enhancements in technology or knowledge, that
are not directly embodied in measures of labour and capital
inputs.
Positive Economic Spillovers and Scale Effects: TFP
improvements come about as a result of positive external
economic effects or spillovers between inputs, which are
not captured in the payments that are made to these factors.
For example, education may have positive spillovers across
the economy which are not directly captured in higher real
wages. Alternatively, TFP improvements come about as a
result of increases in the scale of production, which spread
fixed costs across greater volumes and therefore result in
lower unit costs.
Better Ways of Organising Production: TFP
improvements come about as a result of better combining
existing inputs, so that more output can be produced with
the same product mix.
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, workplace
flexibility, managerial ability,
entrepreneurship and managerial practices.

Economic Effects of a Reduction
in Productivity due to
Inappropriate Regulation
Regulation Taskforce
(2006)
The Regulation Taskforce identified five features of regulations that contribute
to government failure, generating compliance burdens on business and which are
not justified by the intent of the regulation:
Excessive coverage, including regulatory creep Regulations that appear
to influence more activity than originally intended or warranted, or where the
reach of regulation impacting on business, including smaller businesses, has
become more extensive over time.
Regulation that is redundant Some regulations could have become
ineffective or unnecessary as circumstances have changed over time.
Excessive reporting or recording requirements Companies face multiple
demands from different arms of government for similar information, as well as
information demands that are excessive or unnecessary. These are rarely
coordinated and often duplicative.
Variation in definitions and reporting requirements Regulatory variation
of this nature can generate confusion and extra work for businesses than would
otherwise be the case.
Inconsistent and overlapping regulatory requirements Regulatory
requirements that are inconsistently applied, or overlap with other requirements,
either within governments, or across jurisdictions. These sources of burden
particularly affect businesses that operate on a national basis.

Regulatory Governance
Processes and Best
Practice Regulation
Although the costs of regulation to businesses and consumers are a
function of existing regulations, the focus of regulatory governance
in 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, the
most opportune time to examine a new regulation is when it is
being introduced.
It is often easier to identify and prevent a poor regulation being put
into place than to abolish an existing regulation. Furthermore, if it is
not possible to improve the regulation making process, then it is
unlikely that processes which attempt to improve the existing stock
of regulation will succeed.
Reviews of the existing stock of regulation - will become more
difficult, time-consuming and costly if the inflow of inappropriate
regulation is not controlled.
Regulatory governance processes are therefore a critical
determinant of the size and composition of the stock of regulation.
Todays new regulation becomes tomorrows costs to businesses
and consumers. If annual regulatory flows are large, this will tend
to rapidly increase the stock.
It is therefore vital to understand Australias regulatory governance
processes, how they have performed, and how they can be
improved.
Regulatory Governance
Processes and Best
Practice Regulation
Regulatory governance processes can
perform a valuable gatekeeper role,
controlling and reducing the inflow of
regulation.
However, if the gatekeeper role is not
performed adequately, the stock of
poorly designed regulations will
continue to grow.

Ex-Ante Policy
Evaluation: Regulatory
Impact Assessments
The purpose of Australias Regulatory Impact Assessment (RIA)
process is to communicate information about the expected effects of
regulatory proposals to inform political decision makers on whether
and how to regulate.
A Regulatory Impact Statement (RIS) sets out the problem the
regulation addresses, the regulations objectives, different options
to achieve them, an assessment of the impacts of each option, the
consultation undertaken and recommends an option (usually the one
with the greatest net benefit).
Assessing the impact of each option could include estimating the
costs and benefits, measuring business compliance costs, analysing
risks and considering the effects on competition.
The RIA process aims to make regulation more efficient and
effective by having its designers justify the reasons for
implementing a new regulation, consider the costs and benefits of
different options at an early stage and take a community-wide
perspective of their effects, to help ensure that the benefits to
society (broadly conceived) of a regulation are greater than the
costs (also broadly conceived) and to encourage the design and
adoption of the regulation with the greatest net benefit.
Brief History of RIA
processes in Australia
Australia was an early adopter of RIA processes. From 1985,
Cabinet required that regulatory proposals with significant effects
on business include a RIS.
In 1986, the Hawke Government established the Office of
Regulation Review (ORR) to encourage good regulatory practice.
Since then, every inquiry in Australia into how to reduce the
regulatory burden at the Federal level has recommended
strengthening RIA requirements and increasing the ORRs
resources and gatekeeper role.
In 1995, RIA was extended to cover the development of all national
standards.
In 2009, all Australian states and territories had their own
individual RIA processes to cover state government regulations.
Yet, overall, the results of RIA requirements have been
disappointing.
Prior to 1997, the RIA requirements were widely ignored. For
example, in 1996-97 out of 121 Bills that required the preparation
of a RIS, departments only did so in 13 cases, and only 10 (8 per
cent) were fully compliant.84 There were no effective sanctions,
and this led to low levels of compliance.
Brief History of RIA
processes in Australia
Even after the RIS requirements were
strengthened in March 1997, following the
new Howard Governments Bell Review, the
only penalty for non-compliance was to have
it pointed out in the ORRs annual report a
year 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 those
that are more politically sensitive.
Best Practice
Regulatory Analysis
1. I dentification of the Problem
2. Explain Objective
3. I dentify a Range of Options (list of options
must include doing nothing)
4. I mpact Analysis assess costs and
benefits, relative to counterfactual (this
may not be the status quo). Conduct
sensitivity analysis.
5. Consultation
6. Conclusion and Recommended Option
benefits should exceed costs
7. I mplementation and Review


Cost Benefit Analysis
(CBA)
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?
Why do CBA?
Robust assessments of the costs and benefits
of regulations can reduce uncertainty about
the overall effects of individual regulations,
thereby lowering the probability of costly
policy errors, and increasing the chances that
regulations that are passed will actually result
in net benefits to the community.
Furthermore, rigorous assessment processes
can help weed out regulations that are likely
to result in net economic costs.
In other words, a robust regulatory
assessment process can reduce both types of
errors.
Why do CBA?
The analytical framework developed by Little and
Mirrlees (1994) can be used to quantify the gains from
cost 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 is
incorrectly assessed as creating net welfare losses;
and
Type II error: an inappropriate regulation is
passed, either because it is not assessed at all, or
because it is incorrectly assessed as creating net
welfare gains.
Robust governance processes can reduce the
probability of both types of errors.
Why do CBA?
Since the costs of undertaking regulatory impact
assessments are usually small relative to the welfare
effects of regulation, a good economic case can be
made for performing rigorous cost benefit analysis and
undertaking robust regulatory impact statements
even where the reduction in the probability of both
kinds of errors that is produced is relatively small.
The Little-Mirrlees analysis also shows the
importance of not excluding options from regulatory
impact assessments and cost benefit analyses. If one or
more options is excluded, this magnifies the
probability of both kinds of error being made, and so
magnifies the welfare losses of poor regulation, as
well as the gains that are foregone when appropriate
regulations are not passed.

Common Errors in
Cost Benefit Analysis
Counting costs as benefits
Double counting
Wider Economic Benefits and
multipliers
Inappropriate choice of discount rate,
which is used to compare future costs
incurred and future benefits to todays
dollars
Discounting Costs and
Benefits Over Time
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 will
be incurred today.
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) <1.
The term 1/(1+r) is called the discount factor.
In other words, a dollar that is to be received tomorrow must be worth less
than a dollar received today, because I could invest $1 dollar today and get
more than $1 tomorrow.
This process of converting future dollar values into current values so they
can be compared is known as discounting.
To find the value today of $1 to be received tomorrow , we find the present
value of that $1. The present value is $1/(1+r)
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
two years time?
To answer, we just find the present value of each income stream.
We compare $x/(1+r) with $y/(1+r)
2

Social Discount Rate
What discount rate should be used in
evaluating government policies?
How much should society be willing
to give up today in order to obtain
benefits tomorrow? In other words,
what is the social discount rate?
Two approaches:
Ethical approach
Market approach

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 in
order to receive one dollar tomorrow?
What would have to be for you to remain just as well off
after 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 tomorrow in that
case, would be 0.
On the other hand, if you were highly impatient, you would
not be willing to give up any dollars today in order to
receive one dollar tomorrow and would be infinite.
The term is known as the pure 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 one
dollar worth of consumption tomorrow.
Social Discount Rate: Ethical
Approach Allowing for Future
Economic Growth
Future generations will be richer than us they will be able
to produce more.
So in addition to making a judgement regarding the pure
rate of social time preference, we also need to account for
the fact that a cost incurred by us today will benefit someone
much richer than ourselves.
Denote the annual growth rate in production and
consumption is g.
What is this growth worth in utility terms? In general, each
additional unit of consumption worth less than the previous
unit (declining marginal utility of consumption).
So we need to make an assumption about how utility
responds to consumption. This is the elasticity of the
marginal utility of consumption, denoted by (eta).
Multiplying and g together gives total the utility gain from
1 per cent higher consumption.
Social Discount Rate: Ethical
Approach 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 extra
consumption tomorrow.
If there was no economic growth, this decision would
be easy: we could simply focus on the value of the
utility discount factor, compounded continuously over
the 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
Example: Stern Report
on Climate Change
Stern assumes that =0.1, which means that he thinks that
all else being equal, society should be willing to give up
1/(1.001) = 0.999001 dollars today in order to receive one
dollar tomorrow.
Stern assumes that g is 1.3 per cent.
Stern assumes that q=1, which means he assumes that each
additional percentage gain in consumption yields a 1 per
cent gain in utility.
Multiplying and g together gives total the utility gain from
1 per cent higher consumption.
So Stern arrives at a figure for g q 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.

Example: Stern Report
on Climate Change
Individuals in a free market will trade until there are
no more gains from doing so.
If an entire economy is to be in equilibrium, there can
be 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 market
real interest rate of 1.4 per cent.
Most economists think that is unreasonably low.
That is one reason why Stern has been so hotly
debated.
Risk and Cost Benefit
Analysis
Risk and the Discount
Rate
When future benefits and costs are
uncertain, the discount rate must
include an adjustment for risk.
We now use expected costs and
expected benefits, and use a modified
discount factor
The appropriate discount factor is
now:


1
1 risk premium r + +
where r is the risk free rate of return (eg
long term government bond rate)


Risk and Uncertainty
The general rule is that risky assets need to pay a
higher expected return than the risk free rate, in order
to compensate people for bearing the greater amount
of 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?
Risk and Uncertainty
Distinguish two types of risk: market risk and idiosyncratic
risk.
The former is related to the market as a whole, whereas the
latter is specific to particular assets.
Key Point 1: Only the market risk receives a risk premium.
In a well diversified portfolio, idiosyncratic risk can be
completely diversified away.
Suppose that you have wealth of $1 and form a portfolio of
n risky assets. The expected return of each asset is $r, and
each has a variance of o
2

Suppose you invest an equal fraction of your wealth in each
asset.
Then your expected return on each asset is (1/n) r = r/n,
and the variance of each asset is Var[(1/n) o
2
]= o
2
/n
2
. So
the total variance is n o
2
/n
2
= o
2
/n

< o
2
.
Diversification reduces the variance of your portfolio but
not its expected return.
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 of
the risky assets in the economy.
Let r be the risk free rate, r
m
the expected return on the market mutual
fund, and o
m
2
the variance of the market mutual fund.
The only risk in this mutual fund is the risk of the market as a whole
the 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 is x
2
o
m
2
, the standard deviation is xo
m

and
the expected return is (1-x)r+ xr
m

Higher expected returns can be achieved by increasing x, but the
opportunity cost of this is higher risk.
If x = 0, then the expected return is r
and the standard deviation is 0.
If x =1, then the expected return is r
m

and the standard deviation is o
m
For values in between, the expected
return is (1-x)r + xr
m
= r + x(r
m
-r) and
the standard deviation is xo
m


The Price of
Macroeconomic or
Market Risk
Risk-Return Possibilities
Curve
Standard Deviation
of Return
Expected Return
Slope = Opportunity Cost
of Lower Risk=Compensation
for Higher Risk
r
( )
m
x r r
m
xo
The compensation for bearing an
additional amount of pure market or
macroeconomic risk is the slope of this
line, which is:
(r
m
-r)/ o
m
This must be the market price of
macroeconomic risk.

The Market Price of Risk
Now consider any other asset, call it asset j. Suppose that its expected
return is r
j
and suppose that its variance is o
j
2
.
Key Point 2: It turns out that the overall variance of asset j is not what
matters in determining the risk premium for an asset, since part of this
volatility or risk can be diversified away by holding the market mutual
fund.
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 js
returns are correlated with the overall market return
Let |
j
be the riskiness of asset j, relative to the market as a whole.
If |
j
=0, then movements in returns of asset j are, on average,
completely unrelated to the overall market.
If |
j
=1, then movements in returns of asset j are, on average, the
same in percentage terms as the overall market.

The Market Price of Risk
The Market Price of
Risk
The total risk of asset j is its relative riskiness,
multiplied by the total market risk:
Total risk of asset j = |
j
o
m


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

Risk premium = |
j
o
m
p
= |
j
o
m
(r
m
-r)/ o
m

= |
j
(r
m
-r)

For any two assets a and b if we subtract their risk premiums from
their expected return, we must get the same expected return.
And the result must also be equal to the risk free interest rate:
r
a
- |
a
(r
m
-r) = r
b
- |
b
(r
m
-r) = r

So for any asset j, we must have:

r
j
= r+ |
j
(r
m
-r)
This just says that the expected return on an asset is equal to the risk
free rate, plus a risk premium that is equal to the relative riskiness of
that asset multiplied by the market price of risk.
This equation is known as the Capital Asset Pricing Model
The Capital Asset Pricing Model
(CAPM)
The CAPM
Intuitively, if an asset has a low |, then
its returns are not highly correlated with
the rest of the market or the overall
economy.
Such an asset is valuable for an investor
on average, it provides high returns when
the market is down, and low returns when
the market is up.
Since it has this valuable property,
investors dont need to be compensated
with a high risk premium in order to be
willing to hold it.
Hence it has a low expected return in
equilibrium.
The CAPM
The CAPM formula really is an asset pricing
formula because we can rewrite it and express
it as a relationship between the current and
expected future price of an asset.
Suppose that the current price of the risky asset
is P
j
, and that we expect the price of an asset
to be P
j
e
tomorrow.
Then the expected return is r
j
= P
e
j
- P
j
)/P
j

and the CAPM formula says that:

Or:
(P
e
j
- P
j
)/P
j
= r+ |
j
(r
m
-r)
( )
1
e
j
j
j m
P
P
r r r |
=
+ +
The CAPM
This is a very useful formula. It says that the current
price of an asset is equal to its discounted expected
future 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 situations not
just for financial assets but for thinking about the
appropriate 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.
Should we Use a Lower
Discount Rate for
Government Projects?
If the government builds a project, this does
not reduce 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 simply
because the government decides to build it.
CBA Example: The
National Broadband
Network (NBN)
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


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



Just how big is the
proposed 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
V
a
l
u
e

o
f

a
s
s
e
t
s

-

$

b
i
l
l
i
o
n
s
International
comparison - 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 Greece Korea Australia US Japan
Cost Benefit Analysis
of NBN?
The Government did not undertake a
CBA of the NBN
Ergas and Robson (2009) remains the
only 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
of 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 benefits by somewhere between $14 billion and $20 billion,
depending on the discount rate used.