ANALYSIS OF IMPACTS ACCORDING TO RELATIVE PROSPERITY

5  The impact of a proposal on an individual's well-being will vary according to income; as income grows, the satisfaction derived from an additional unit of consumption declines.

6  The relative prosperity of a household affected by a proposal is determined not only by its income, but also by its size and composition. For example, a single person on £100 a week is better off than a couple on £100 a week. Table 5.1 adjusts for varying costs of living for some specimen family types through a process called equivalisation. These calculations use the McClements scale1 that takes account of the number of adults and the number and ages of children in the household.

TABLE 5.1:INCOME RANGES BY QUINTILE OF EQUIVALISED NET INCOME

TABLE 5.2:INCOME RANGES BY QUINTILE OF EQUIVALISED GROSS INCOME

7  Appraisers should assess how the costs and benefits of each option are spread across different income groups, such as the income quintiles provided in Table 5.1 or Table 5.2.2 A proposal providing greater net benefits to lower income quintiles is rated more favourably than one whose benefits largely accrue to higher quintiles.

8  Further analysis can then be undertaken, using distributional weights, to recognise the identified impacts within the cost-benefit analysis. A benefit or cost accruing to a relatively low income family would be weighted more heavily than one accruing to a high income family.

9  In principle, each monetary cost and benefit should be weighted according to the relative prosperity of those receiving the benefit or bearing the cost.3 However, in practice, this information is most unlikely to be available at acceptable cost for many applications. The decision on whether an explicit adjustment is warranted should be informed by the:

❑  Scale of the impact associated with a particular project or proposal;

❑  Likely robustness of any calculation of distributional impacts; and,

❑  The type of project being assessed.

10  If appraisers decide not to use distributional weights to make an explicit adjustment, this decision must be fully justified.

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1  DWP, Households Below Average Income, (2000/01)

2  Where a household being assessed is not defined by one of the categories in Table 5.1 or Table 5.2, appraisers should use the closest specimen family.

3  Generally, non-monetary costs and benefits (eg life, health, time savings, etc) are not adjusted as they are considered to be independent of income. For example, the DfT's valuation of non-working travel time savings is averaged across all income groups, so has already been implicitly equity weighted. If values are not standard and are calculated for a specific project an adjustment might still be required.