unit 3 cont economic analysis cost benefit analysis 1 n.
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Unit 3 (cont.): Economic Analysis— Cost-Benefit Analysis 1. Meaning of Cost-Benefit Analysis. What is Cost-Benefit Analysis?. Meaning of Cost-Benefit Analysis. Definition:

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meaning of cost benefit analysis
Meaning of Cost-Benefit Analysis

What is Cost-Benefit Analysis?

meaning of cost benefit analysis1
Meaning of Cost-Benefit Analysis


  • “… is a useful approach to assess whether decisions or choices that affect the use of scarce resources promote efficiency… [The] analysis involves systematic identification of policy consequences, followed by valuation of social benefits and costs and then application of the appropriate decision criterion” (Fuguitt & Wilcox, 1999: 35).
meaning of cost benefit analysis2
Meaning of Cost-Benefit Analysis
  • Entails comparison of costs & benefits of a single project or alternative projects
  • NOT just about financial analysis of revenues and expenditures but “social’’ costs and “social” benefits
  • —the gains and losses of a project as viewed from the standpoint of society as a whole
  • It is used to inform decisions
meaning of cost benefit analysis3
Meaning of Cost-Benefit Analysis
  • Where in the Project Life Cycle do we Need to do Cost-Benefit Analysis (CBA)?
who does cost benefit analysis
Who does Cost Benefit Analysis?

Government—its goal is to promote public interest and increase social welfare

Private corporations—some private decisions have social goals in mind; or government may demand it

Non-profit organizations—most of them have social goals or depend on public funds (e.g. environmental NGOs)

examples of areas where cba can be applied
Examples of Areas Where CBA can be Applied

Water resource projects

Transportation projects

Education programs

Pollution control projects

Endangered species preservation

Etc, etc, etc


What is the main rationale behind Cost-Benefit Analysis as a decision-making tool?

What is it intended to achieve?

rationale for cost benefit analysis
Rationale for Cost Benefit Analysis

EFFICIENCY is at the heart of CBA

whether benefits derived are worth the costs

used to identify most EFFICIENT alternative

What is Efficiency?

option that yields the most outputs for a given amount of inputs

used as basis for economically rational allocation of scarce resources

meaning of costs and benefits
Meaning of Costs and Benefits

What is Cost?

  • the opportunity cost of all resources to be used for a project
  • Opportunity cost = the value that would have been derived from these resources had they been allocated to the next best alternative foregone
meaning of costs and benefits1
Meaning of Costs and Benefits
  • Benefits
    • positive outcomes of a project
    • manifestations of project objectives, plus unintended positive consequences
meaning of costs and benefits2
Meaning of Costs and Benefits

What are Disbenefits?

  • undesirable (negative) consequences (disadvantages) suffered by society or a section of society as a result of a project, e.g. economic losses, pollution, nuisance, etc
  • usually unintended outcomes
with without vs before after
“With & Without” vs“ Before & After”
  • CBA deals with incremental benefits and incremental costs
  • not a before-and-after analysis: i.e. not estimation of difference in costs and benefits b/n the time before (baseline scenario) and the time after the project
    • Incremental benefits = (benefits with the project) minus (benefits without the project)
    • Incremental costs = (costs with the policy) minus (costs without the project)
basic steps of cba
Basic Steps of CBA

Define alternativesto be evaluated

Identify all expected social costs and social benefits

Valuesocial benefits and costs in monetaryterms

Determine appropriate CBA decision criterion(a)

Assess alternatives based on CBA decision criteria chosen

Describe consequences that can not be valued in monetary terms

Report resultsfor consideration by decision makers

decision criteria in cost benefit analysis
Decision Criteria in Cost-Benefit Analysis
  • Three common CBA-based decision criteria:
    • Net Present Value (NPV)
    • Cost-Benefit Ratio (CBR)
    • Internal Rate of Return (IRR)
      • a discount rate such that NPV = 0
      • Desirable if IRR > actual discount rate  WHY?