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<br />DEFICIENCIES OF BENEFIT-COST RATIOS <br /> <br />A little recognized fact is that water resource investments, <br /> <br />such as construction of dams and irrigation canals, generate more <br /> <br />employment and output than an equal increase in effective demand <br /> <br />for non-construction gross national product. This is true because <br /> <br />the employment associated with this water resource development is <br /> <br />drawn from occupational groups which experience above average <br />unemployment rates (these groups include 1) craftsmen, foramen, and <br />kindred workers; 2) operations and kindred workers; and 3) non-farm <br /> <br />. <br /> <br />unskilled laborers.) A related point is that this type of govern- <br /> <br />ment spending will affect a sector of the economy which is sensitive <br />to movements in the business cycle.9 A further point, documented by <br /> <br />~ <br /> <br />research, is that <br /> <br />.....when the on-site labor impact is included, water <br />resource investment in a depressed area distributes income <br />and employment to the area in a significantly greater volume <br />than would an increase of an equivalent amount in a final <br />demand vector in the composition of the gross national <br />product.lD <br /> <br />:~ <br />,- <br /> <br />~ <br /> <br />~'. <br /> <br />As a result of these observations, it may happan that the cost <br /> <br />of investing in water resource projects is significantly overstated <br /> <br />~ <br />~ <br />: <br /> <br />when market prices are used to represent opportunity costs when <br /> <br />construction occurs in areas suffering substantial unemployment. <br /> <br />For example, Haveman and Krutilla found that, when less than full <br /> <br />employment conditions prevail, the nominal benefit-cost ratio <br /> <br />associated with any given ratio of operating, maintenance, and <br /> <br />replacement costs to annual capital costs (annual interest and <br /> <br />amortization charges) diverges from the real benefit-cost ratio <br /> <br />in proportion to the increase in the unemployment rate. For <br /> <br />13 <br />