Cost-Benefit Analysis
Cost-Benefit Analysis is a systematic approach used to evaluate the potential costs and benefits of a decision, project, or policy. It involves comparing the total expected costs against the total expected benefits to determine whether the benefits outweigh the costs. This analysis helps in making informed decisions by quantifying and comparing the positive and negative aspects of different options.
8 Key excerpts on "Cost-Benefit Analysis"
eBook - ePubDevelopment Policy and Planning
An Introduction to Models and Techniques
- Anis Chowdhury, Colin Kirkpatrick(Authors)
- 2003(Publication Date)
- Routledge(Publisher)
...7 Cost-Benefit Analysis Introduction Cost-Benefit Analysis (CBA) is perhaps the best known technique for public policy analysis and is widely used by policy makers in both advanced and developing economies. In contrast to the models and techniques discussed so far, which have dealt with macro, sectoral and industry level planning decisions, CBA is applied to the most disaggregated level of activity, the individual investment project. As we emphasized at the beginning of the book, the basic problem of planning is that of allocating limited resources among alternative uses in a way that will make the net benefit to the economy as large as possible (benefit, of course, can be defined in a number of ways, depending on the objective function selected). Since resources are limited, choices have to be made, and CBA, or what is often called project appraisal, is a method of evaluating the alternative options in a consistent and comprehensive manner. The basic principle of CBA can be stated simply: if the benefits of a project exceed its costs, where both benefits and costs are measured in the same terms, then the project is worth proceeding with, but if costs exceed benefits the project is rejected. There are three main elements in any project appraisal. The first involves the identification of the relevant benefits and costs of the project. Here, we need to identify the increase in outputs (benefits) which are the result of the project, and the reduction in the supply of inputs (costs) available to the rest of the economy which can be attributed to the project’s existence. The benefits and costs are identified, therefore, as the differences in availability of outputs and inputs with and without the project. The second stage involves the valuation of the identified costs and benefits in terms of a common yardstick, so that the various outputs and inputs can be added together to give an aggregate valuation of total benefits and total costs...
eBook - ePubPolicy Analysis as Problem Solving
A Flexible and Evidence-Based Framework
- Rachel Meltzer, Alex Schwartz(Authors)
- 2018(Publication Date)
- Routledge(Publisher)
...Indeed, policies that can be shown to achieve both efficiency and equity goals are often more viable (Vining and Weimer 2009). CBA is an important part of making the efficiency case. This chapter will provide enough guidance for creating basic CBAs, including how to discount and conduct CEAs. More importantly, this chapter will equip the analyst to understand and critique CBAs, such that he or she can be an informed consumer of the widely used tool. In addition to covering the fundamentals of CBA, we consider its technical and ethical limitations and the challenges with applying it in a realistic way. We offer strategies for using CBA in the context of social justice issues and, more generally, for applying it flexibly. CBA is one of several evaluative components in an analysis, and we expect that it will be used to supplement, not replace, other criteria. We repeatedly return to the notion that “CBA is a ‘decision tool, not a decision rule’ ” (Henrichson and Rinaldi 2014). What Is CBA? CBA is what the name implies: an assessment of the costs and benefits of a project. The costs are understood as resources employed and the benefits are the opposite, cost savings (or negative costs) (Patton et al. 2013: 194–195). Once the costs and benefits for a project have been determined (this process will be discussed in more detail later), the overall merits for the project are captured in the difference between those costs and benefits. CBA relies on a very intuitive formula: Net Benefit = Benefits − Costs, or NB = B − C Comparing costs to benefits is not a novel idea; indeed, the stagist method that we have presented thus far essentially weighs the costs against the benefits for proposed policy options. The innovation of CBA is that it relies entirely on monetizing the costs and benefits, or expressing everything in dollar terms. In monetizing costs and benefits, it collapses multiple criteria (like cost, effectiveness, and time) into a single metric, the net benefit...
eBook - ePub- Craig Langston, Craig Langston(Authors)
- 2008(Publication Date)
- Routledge(Publisher)
...8 Cost-Benefit Analysis DOI: 10.4324/9780080518251-8 8.1 Introduction Cost-Benefit Analysis (CBA) is a technique for comparing the flows of expenditure (costs) and the flows of revenue (benefits) as a guide to choosing between alternative investments. CBA can be divided into two main types: economic and social. Economic Cost-Benefit Analysis is commonly used by the private sector to evaluate any investment project. The costs are those involved in acquisition, construction and operation of the facility while the benefits are those received through rent, sale or other form of earning capacity. Both costs and benefits are relevant to the client or providing authority and are used to indicate the level of profitability that can be expected. This type of analysis is also referred to as ‘financial analysis’. Social Cost-Benefit Analysis is more for use in the public sector and is generally applied to large-scale infrastructure projects The costs and benefits include ‘intangibles’ that cannot easily be measured in monetary terms and ‘externalities’ that affect society as a whole. Therefore this type of analysis does not indicate whether or not a project is profitable to the client or providing authority, but rather whether the project contributes to the overall welfare of the community. This type of analysis is also referred to as ‘economic appraisal’. In all other ways economic and social Cost-Benefit Analysis are the same. Cost and benefits are identified over a number of years, the net benefit is calculated for each year and discounted. Net present value is used as the main decision criterion, risk analysis is undertaken to test the sensitivity of the decision and a final recommendation is made...
eBook - ePubThe Policy Analyst's Handbook
Rational Problem Solving in a Political World
- Lewis G. Irwin(Author)
- 2015(Publication Date)
- Routledge(Publisher)
...4 Cost-Benefit Analysis 4.1 The Sole Criterion We apply the technique of Cost-Benefit Analysis (CBA) in our policy analysis when we are most concerned with the criterion of efficiency. In the context of policy analysis, the term “efficiency” refers to the allocation of scarce resources in a way that maximizes the resulting net benefits of that resource allocation. Put another way, efficiency, as it relates to CBA, refers to achieving our best possible “return on investment” for our money. In a sense, efficiency is very closely related to the idea of utility, except that whereas utility usually refers to the greatest amount of good for the greatest number of people, efficiency seeks to maximize the benefits available to a target group or constituency. In policy analysis, this target group or constituency can be (and often is) society in general, but it is just as often a client, organization, city, or some other segment of the population. In any event, we adopt the CBA technique and the sole criterion of efficiency when our goal is to determine the policy that provides the largest net benefit possible to the target group relative to the cost of the policy change. CBA uses money as the primary unit of analysis in achieving this analytical goal, as we translate the likely effects of the proposed policy changes into a summary of associated costs and benefits. Obviously, however, not all of the consequences of most policy changes can be reduced to dollar terms, and therefore the use of this sole evaluative criterion is a simplifying and limiting assumption. While this simplifying assumption does not entirely preclude the inclusion of normative and “intangible” concerns in the CBA, it is often difficult, if not impossible, to capture these normative considerations in any meaningful way once the CBA is underway. For example, consider a fairly typical subject of CBA, the decision of whether to build a dam in a local community...
- Carla Guerriero(Author)
- 2019(Publication Date)
- Academic Press(Publisher)
...In this context, CBA is important to policy development across a wide range of sectors insofar as it enables political elites inside public-sector organizations to replace central planning and avoid responsibilities for associated failures, with a system of market incentives and mechanisms that allow rational choice making to determine appropriate policy ends. Under the rubric of CBA, available policy options become a continuum of initiatives differentiated according to differential levels of cost, quality, and benefit. For public sector elites, CBA enables the reimagination of responsibility for policy-making, and the associated potential for failure, as a talent for public administration. Under CBA, policy-making becomes decision-making, the requirement for senior public-sector managers to select from menu of available initiatives, shielded from responsibility for failure, insofar as decision-making activity proceeds on the basis of business plans, quotes, quality assurances, work practices and contracting skills. With the organizational reform of the public sector and corporate bureaucracies into quasi-business operating within quasi-markets, CBA has become centrally important to contemporary public administration in the 21st century (Considine and Lewis, 1999). 9.1.1 Why is cost–benefit analysis relevant to health and environmental policy? At the fundamental level the relevance of CBA to health and environmental policy-making is its ability to force the issues of the environment and human health into the mainstream of rational calculation. In the context of environmental policy-making, CBA is a prospective or retrospective means for appraising interventions ultimately aimed at the prevention of environmental harms. It is also a mechanism for assessing the levels of benefit and harm involved in productive activities...
eBook - ePub- Jerry Miner(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...7 Benefit-Cost Analysis Benefit-cost analysis is a technique for assessing the economic utility of a public investment project. The technique can be used to indicate whether a specific expenditure should be undertaken. It can also be used to determine the appropriate scale of investment and thus the optimum size of a specific investment project, as well as the product-mix, capital intensity, and other aspects of project design. A benefit-cost approach can also be employed as the framework for a general theory of government investment. In this chapter emphasis will be placed on benefit-cost as a decision technique, although some attention is also directed to benefit-cost as investment theory. Although benefit-cost has been most often used in analyzing the justification for investment in physical resources, in recent years it has been extended to the analysis of investment in human resources. As a decision technique the results of benefit-cost are, at best, a helpful guide. The outcome of the analysis alone does not constitute the decision. Benefit-cost is simple in concept, reflecting a most elementary decision rule: No rational person could be expected to undertake actions where anticipated costs exceeded anticipated benefits. But the practical applications become more complicated. Benefit-cost analysis is a part of established budgetary procedures in the field of water resources. The term is also used to describe a general method of analysis of any public expenditure, whether that expenditure represents investment in physical or human capital. As such, it may be distinguished from cost-effectiveness or cost-utility analysis, although existing terminology is by no means standardized (G. A. Steiner, 1965, p. 311; Goldman, 1967). The term “cost effectiveness” emerged from the analysis of military programs where objectives were prespecified and the purpose of the analysis was to explore the relative merits of alternative means of accomplishing the specified objective...
- Anne Graham, Nicole Adler, Ofelia Betancor, Volodymyr Bilotkach, Enrique J. Calderón, Gianmaria Martini, Hans Martin Niemeier, António Pais Antunes, Anne Graham, Nicole Adler, Ofelia Betancor, Volodymyr Bilotkach, Enrique J. Calderón, Gianmaria Martini, Hans Martin Niemeier, António Pais Antunes(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...However, if they are claiming to measure the impact (for example, of Emirates being permitted to fly to Berlin), or the benefits from those flights, they must be regarded as questionable. EIA does not, and cannot, estimate the impact of these flights nor their benefits, if only because it is a technique which measures the positive effects of the change but not the negative effects. It is clear however that many readers would assume that the studies are measuring the impacts or the benefits. Cost benefit analysis CBA is an evaluation technique which has been used in a number of studies of liberalisation of domestic and international liberalisation, though it has not been used very widely. The theory of how it can be applied to evaluate whether a country gains or not from allowing access to the routes it controls to foreign airlines has been developed thoroughly, however. Several times studies have measured the costs and benefits of allowing access even though they have not used the term ‘CBA’ – nevertheless, these studies are indeed CBAs. Perhaps the earliest use of CBA to examine liberalisation questions came in an Australian Government report, the International Civil Aviation Policy Report of 1978 (International Civil Aviation Policy, 1978) – this report measured the costs and benefits to airlines and passengers and the net surplus, of liberalisation options being considered. Morrison and Winston used an explicit cost and benefit framework to analyse the benefits of US domestic airline deregulation (Morrison and Winston, 1986). The Australian framework was further developed in a 1988 Report (Department of Transport and Communications, 1988). The most rigorous CBA studies were those used by the Australian Productivity Commission in 1998 (Productivity Commission, 1998) and the accompanying study by Gregan and Johnson (Gregan and Johnson, 1999), and in Canada by Gillen et al. (2002). Further developments of the CBA approach have been Gillen et al...
eBook - ePub- Raghbendra Jha(Author)
- 2009(Publication Date)
- Routledge(Publisher)
...21 Cost-Benefit Analysis and randomized evaluation DOI: 10.4324/9780203870044-21 Key concepts: net present value, internal rate of return, benefit–cost ratio; social rate of discount; shadow prices; first- and second-order approximations; Little–Mirrlees and UNIDO criteria; randomized evaluation. 21.1 Introduction In its most general form Cost-Benefit Analysis refers to changes in the allocation of resources brought about by a project. Thus Cost-Benefit Analysis is, in principle, a straightforward matter. One looks at the allocation of resources before and after the installation of a project. Given some norm of calculating social welfare, one can compare it in the two situations. If social welfare is higher after the project is installed, then the project is worthwhile, otherwise it is not. In practice, however, Cost-Benefit Analysis 1 turns out to be quite a complex matter. We will encounter and try to come to grips with these difficulties later in this chapter, but some can be mentioned here as well. Let us assume that we live in the simple world of the second optimality theorem of welfare economics studied in Chapter 2. Suppose, then, that we have perfect competition as well as Pareto optimality. Consider a project which is a marginal investment decision on the part of the government. The output from this project can be easily priced and we know that this price will reflect the true social opportunity cost of output. Similarly, the inputs can be priced in a satisfactory manner. If the project is going to yield benefits over a period of time or/and require inputs over a period of time, we know that the real rate of interest (which in equilibrium equals the marginal product of capital) will be the proper discount rate for discounting the stream of future benefits and costs. It is in this kind of world that Cost-Benefit Analysis is a straightforward matter. In the real world, however, things are nowhere as simple...
