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Cost-Benefit Analysis. Presentation By: Sameer Mzai Ashtar Hussain Abdul Wahid Ilyaas. Definition.

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Cost benefit analysis

Cost-Benefit Analysis

Presentation By:

Sameer Mzai Ashtar Hussain

Abdul Wahid

Ilyaas


Definition
Definition

  • Cost-benefit analysis (CBA), is an economic decision-making approach, used particularly in government and business. CBA is used in the assessment of whether a proposed project, programme or policy is worth doing, or to choose between several alternative ones.

  • It involves comparing the total expected costs of each option against the total expected benefits, to see whether the benefits outweigh the costs, and by how much.

  • In CBA, benefits and costs are expressed in money terms, and are adjusted for the time value of money, so that all flows of benefits and flows of project costs over time (which tend to occur at different points in time) are expressed on a common basis in terms of their "present value."


  • CBA developed and the integration of environmental impacts into CBA did lead to some Significant changes.

  • Reasons: Techniques and Measuring economic value of changes in assets.

  • Measuring all changes in well-being by a policy or project via MTA ( Material Balance principles which all projects have environmental impacts.

  • Discount rates as the 2nd contribution and choice to environmental issues.

  • Discount rates says if we want to compare benefits and costs occurring at different time scales discounting is needed to express future costs or benefits at today’s equivalent value.


  • Problems with positive discounting raised and later it appeared inconsistent with sustainable development because it imply that current generations should not impose significant costs on future generations.

  • 1972 assembly arranged for discounting by top analysts, and they produced impressive technical volume on selecting Discount rates on resources for future.

  • In a volume by Lind on 500 pages the analysts were not specific about discount rates.

  • Weitzman suggested the trivialization of large future costs by discounting rises because of the confusion between discount rates and discount factors.


  • Weitzman appeared inconsistent with sustainable development because it imply that current generations should not impose significant costs on future generations. suggested also that future should be more keep in concern than former to produce the results that the discount rates decline over time.

  • He also suggested about rules of thumb appropriate about short and long-run discount rates.

  • 3rd area in which enviroment economics modified CBA arose from contribution of (Krutilla and Fishers).

  • The problem developed from the use of CB procedures to evaluate projects that had effects while some projects didn’t had positive effect.

  • Major Adjustment by Krutilla given about CB procedures which is the nonuse values of enviromental amenity as part of opportunity cost of development.


  • 2 appeared inconsistent with sustainable development because it imply that current generations should not impose significant costs on future generations.nd adjustment was building in the rate of technological changes as a decay factor in benefits of development. (electricity) Lowers the present value of the benefits by raising effectively the discount rates applied to development benefits.

  • 3rd adjustment involves raising the present value of the benefits by lowering the discount rate applied on those benefits.

  • Price effect will also effect the demand and supply of the benefits on fixed environmental assets which grows over time.


  • Final appeared inconsistent with sustainable development because it imply that current generations should not impose significant costs on future generations. Consideration involves value of delaying irreversible actions, Delay generates more info and more info means more strong better decision.

  • Uncertainty is the one of the major problems in natural environment and its main cause is to have decision in the lack of information.

  • Conservation generates information essentially.

  • Dixit and Pindyck explained the option theory which is originally formulated in the context of financial markets, results in the modification of CBA.

  • Precautionary Principle widely adopted in international and national legislations.

    As a result Cost benefit Analysis is having major aspect in development and the important factor is modifications. Therefore environmental economics improved to extend this Cost Benefit Analysis.


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