The role of value added in benefit/cost analysis

The problem is to determine the role of value-added information in obtaining a measure of the benefits of public investment. Net benefit in a benefit/cost analysis is the change in economic surplus, i.e., the sum of the increase in consumer surplus and economic rent. An increase in productivity causes an increase in economic surplus. Thus, a productivity index is necessary but not sufficient information needed to measure the change in economic surplus. Information on value added can be used to establish productivity. Diewert's quadratic lemma is used to derive an index of productivity as the difference between indexes of value added and its primary components in the context of a non-homothetic production function. It is concluded that this same procedure should be used to measure productivity in either a taut or a slack economy.The author would like to thank Judith Brown and Jack Stabler for their helpful comments on earlier drafts of this article.This research was supported, in part, by interregional research project IR-6, the Idaho Agricultural Experiment Station project 054-H923, and a University of Idaho, Research Council Seed Grant.