Social Cost Benefit Analysis
INTRODUCTION
What is Social Cost Benefit Analysis?
Cost-benefit analysis is a process for evaluating the merits of a particular project or course of action in a systematic and rigorous way. Social cost-benefit analysis refers to cases where the project has a broad impact across society {and, as such, is usually carried out by the government. While the cost and benefits may relate to goods and services that have a simple and transparent measure in a convenient unit (e.g. their price in money), this is frequently not so, especially in the social case. It should therefore be emphasized that the costs and benefits considered by (social) `cost-benefit' analysis are not limited to easily quantifiable changes in material goods, but should be construed in their widest sense, measuring changes in individual `utility' and total `social welfare' (though economists frequently ex- -press those measures in money-metric terms). In its essence cost-benefit analysis is extremely, indeed trivially, simple: evaluate costs and benefits for the project under consideration and proceed with it if, and only if, benefits match or exceed the costs.
There are a variety of factors: • Benefits and costs may accrue to different sets of people. If this is so we need someway to aggregate and compare different benefits and costs across people. • Benefits and costs may occur at different points in time. In this case we need to compare the value of outcomes at different points in time. • Benefits and costs may relate to different types of goods and it may be difficult to compare their relative values. This usually occurs when one of the goods does not have an obvious and agreed upon price. For example, we may be spending standard capital goods today in order to obtain environmental benefits tomorrow. • Benefits and costs may be uncertain. • Benefits and costs may be difficult to calculate and, as a result, there may be widely
What is Social Cost Benefit Analysis?
Cost-benefit analysis is a process for evaluating the merits of a particular project or course of action in a systematic and rigorous way. Social cost-benefit analysis refers to cases where the project has a broad impact across society {and, as such, is usually carried out by the government. While the cost and benefits may relate to goods and services that have a simple and transparent measure in a convenient unit (e.g. their price in money), this is frequently not so, especially in the social case. It should therefore be emphasized that the costs and benefits considered by (social) `cost-benefit' analysis are not limited to easily quantifiable changes in material goods, but should be construed in their widest sense, measuring changes in individual `utility' and total `social welfare' (though economists frequently ex- -press those measures in money-metric terms). In its essence cost-benefit analysis is extremely, indeed trivially, simple: evaluate costs and benefits for the project under consideration and proceed with it if, and only if, benefits match or exceed the costs.
There are a variety of factors: • Benefits and costs may accrue to different sets of people. If this is so we need someway to aggregate and compare different benefits and costs across people. • Benefits and costs may occur at different points in time. In this case we need to compare the value of outcomes at different points in time. • Benefits and costs may relate to different types of goods and it may be difficult to compare their relative values. This usually occurs when one of the goods does not have an obvious and agreed upon price. For example, we may be spending standard capital goods today in order to obtain environmental benefits tomorrow. • Benefits and costs may be uncertain. • Benefits and costs may be difficult to calculate and, as a result, there may be widely