Additionality An impact arising from an intervention is additional if it would not have occurred in the absence of the intervention.
Adverse Selection When asymmetric information restricts the quality of the good traded. This typically happens because the person with more information is able to negotiate a favourable exchange.
Affordability An assessment of whether proposals can be paid for in terms of cashflows and resource costs.
Appraisal The process of defining objectives, examining options and weighing up the costs benefits, risks and uncertainties of those options before a decision is made.
Assessment(s) Either an appraisal or an evaluation (or both).
Base Case The best estimate of how much a proposal will cost in economic terms, including an allowance for risk and optimism.
Choice modelling This term encompasses a range of stated preference techniques and includes choice experiments (often preferred because of its firm base in welfare economics), contingent ranking, contingent rating and paired comparisons.
Contingent valuation This involves directly asking people how much they would be willing to pay for a good or service, or how much they are willing to accept to give it up.
Contingency An allowance of cash or resources to cover unforeseen circumstances.
Cost Benefit Analysis Analysis which quantifies in monetary terms as many of the costs and benefits of a proposal as feasible, including items for which the market does not provide a satisfactory measure of economic value.
Cost-Effectiveness Analysis Analysis that compares the costs of alternative ways of producing the same or similar outputs.
Cost of capital The cost of raising funds (expressed as an annual percentage rate).
Cost of variability in outcomes This is the most a person is willing to pay to have a benefit that is certain, rather than one that is uncertain.
Crowding out The extent to which an increase in demand occasioned by government policy is offset by a decrease in private sector demand.
Deadweight Expenditure to promote a desired activity that would in fact have occurred without the expenditure.
Diminishing marginal utility The tendency as extra units of any commodity or service are used up or 'consumed', for the satisfaction provided by those extra units to decline.
Discounting A method used to convert future costs or benefits to present values using a discount rate.
Discounted Cash Flow (DCF) A technique for appraising investments. It reflects the principle that the value to an investor (whether an individual or a firm) of a sum of money depends on when it is received.
Discount rate The annual percentage rate at which the present value of a future pound, or other unit of account, is assumed to fall away through time.
Displacement The degree to which an increase in productive capacity promoted by government policy is offset by reductions in productive capacity elsewhere.
Do minimum option An option where government takes the minimum amount of action necessary.
Economic cost (or opportunity cost) The value of the most valuable of alternative uses.
Economic Efficiency This is achieved when nobody can be made better off without someone else being made worse off.
Effectiveness A measure of the extent to which a project, programme or policy achieves its objectives.
Evaluation Retrospective analysis of a project, programme, or policy to assess how successful or otherwise it has been, and what lessons can be learnt for the future. The terms 'policy evaluation' and 'post-project evaluation' are often used to describe evaluation in those two areas.
Existence value The value placed by people on the continued existence of an asset for the benefit of present or future generations. The latter is sometimes referred to as bequest value. See also Use value.
Expected value The weighted average of all possible values of a variable, where the weights are the probabilities.
Externality costs or benefits The non-market impacts of an intervention or activity which are not borne by those who generate them.
GDP deflator An index of the general price level in the economy as a whole, measured by the ratio of gross domestic product (GDP) in nominal (i.e. cash) terms to GDP at constant prices.
Hedonic pricing Deriving values by decomposing market prices into their constituent characteristics.
Information asymmetry Differences in information held by parties to a transaction where this information is relevant to determining an efficient contract or a fair price or for monitoring or rewarding performance.
Impact statement A description, quantified where possible, of all the significant impacts of a proposal, and of how they are distributed between those affected.
Implementation The activities required during the period after appraisal to put in place a policy, or complete a programme or project, at which point 'normal' service is achieved.
Internal rate of return (IRR) The discount rate that would give a project a present value of zero.
Irreversibility This applies when an option would rule out later investment opportunities, or would use resources now that might subsequently be preferred for a more important later use.
Market failure An imperfection in the market mechanism that prevents the achievement of economic efficiency.
Market value The price at which a commodity can be bought or sold, determined through the interaction of buyers and sellers in a market.
Marginal utility The increase in satisfaction gained by a consumer from a small increase in the consumption of a good or service.
Monte Carlo analysis A technique that allows assessment of the consequences of simultaneous uncertainty about key inputs, taking account of correlations between these inputs.
Moral Hazard An example of information asymmetry where a contract or relationship places incentives upon one party to take (or not take) unobservable steps which are prejudicial to another party.
Multi Criteria Analysis See Weighting and Scoring
Net Present Value (NPV) The discounted value of a stream of either future costs or benefits. The term Net Present Value (NPV) is used to describe the difference between the present value of a stream of costs and a stream of benefits.
Opportunity cost (or Economic cost) The value of the most valuable of alternative uses.
Optimism bias The demonstrated systematic tendency for appraisers to be over-optimistic about key project parameters, including capital costs, operating costs, works duration and benefits delivery.
Option appraisal The appraisal of various options chosen to achieve specific objectives.
Option value The value of the availability of the option of using an environmental or other asset (which in this context is usually non-marketed) at some future date. See also Use value.
PFI Private Finance Initiative
PPP Public Private Partnership
Precautionary principle The concept that precautionary action can be taken to mitigate a perceived risk. Action may be justified even if the probability of that risk occurring is small, because the outcome might be very adverse.
Present Value The future value expressed in present terms by means of discounting
Price index A measure of the amount by which prices change over time. General price indexes cover a wide range of prices and include the GDP deflator and the Retail Price Index (RPI). Special price indices apply to one commodity or type of commodity.
Proposal An idea for a policy, programme or project that is under appraisal.
Public Sector Comparator Public Sector Comparator is a hypothetical risk-adjusted costing, by the public sector as a supplier, to an output specification produced as part of a PFI procurement exercise. It:
- is expressed in net present value terms;
- is based on the recent actual public sector method of providing that defined output (including any reasonably foreseeable efficiencies the public sector could make); and,
- takes full account of the risks which would be encountered by that style of procurement.
Pure time preference Pure time preference is the preference for consumption now, rather than later.
Real option theory This presumes that decision making is sequential and that decision makers may benefit from choosing options that may seem sub optimal today but which increase flexibility at later times, leading to better decision making when more is known about the project.
Real price The nominal (i.e. cash) price deflated by a general price index, e.g. RPI or GDP deflator, relative to a specified base year or base date.
Real terms The value of expenditure at a specified general price level: that is a cash price or expenditure divided by a general price index.
Relative price effect The movement over time of a specific price index (such as construction prices) relative to a general price index (such as the GDP deflator).
Relevant cost/benefit All costs and benefits that can be affected by decisions and that are therefore related to the objectives and scope of the proposal in hand.
Required rate of return A target average rate of return for a public sector trading body, usually expressed, for central government bodies, as a return on the current cost value of total capital employed.
Resources/ resource cost Terms used in a variety of senses, according to context. In resource accounting, 'resource costs' are accruals accounting costs expressed in real terms. In economic analysis a distinction is sometimes drawn between 'transfers', such as social security payments and 'resource costs' which are payments for goods or services. In departments and agencies 'resources' is a term sometimes used to describe expenditure from their budgets, or sometimes requirements of staffing.
Revealed preference The inference of willingness to pay for something which is non-marketed by examining consumer behaviour in a similar or related market.
Risk The likelihood, measured by its probability, that a particular event will occur.
Risk register / log A useful tool to identify, quantify and value the extent of risk and uncertainty relating to a proposal.
Sensitivity analysis Analysis of the effects on an appraisal of varying the projected values of important variables.
Shadow price The opportunity cost to society of participating in some form of economic activity. It is applied in circumstances where actual prices cannot be charged, or where prices do not reflect the true scarcity value of a good.
Social Benefit The total increase in the welfare of society from an economic action - the sum of the benefit to the agent performing the action plus the benefit accruing to society as a result of the action.
Social Cost The total cost to society of an economic activity - the sum of the opportunity costs of the resources used by the agent carrying out the activity, plus any additional costs imposed on society from the activity.
Stated preference Willingness to pay for something that is non-marketed, as derived from people's responses to questions about preferences for various combinations of situations and/ or controlled discussion groups.
Substitution The situation in which a firm substitutes one activity for a similar activity (such as recruiting a different job applicant) to take advantage of government assistance.
Switching point or switching value The value of an uncertain cost or benefit at which the best way to proceed would switch, for example from approving to not approving a project, or from including or excluding some extra expenditure to preserve some environmental benefit.
Systematic risk Risk which is correlated with movements in the economic cycle and cannot therefore be diversified away.
Time preference rate Preference for consumption (or other costs or benefits) sooner rather than later, expressed as an annual percentage rate.
Total Economic Value The sum of the use, option and existence value of a good: a term used primarily in environmental economics.
Transfer payment A transfer payment is one for which no good or service is obtained in return.
Uncertainty The condition in which the number of possible outcomes is greater than the number of actual outcomes and it is impossible to attach probabilities to each possible outcome.
Use value Value of something which is non-marketed provided by people's actual use of it. See also Existence value and Option value.
Weighting and Scoring An technique that involves assigning weights to criteria, and then scoring options in terms of how well they perform against those weighted criteria. Weighted scores are then summed, and can then be used to rank options.
Willingness to Accept The amount that someone is willing to receive or accept to give up a good or service.
Willingness to Pay The amount that someone is willing to give up or pay to acquire a good or service.