Cost Benefit Analysis

1474 Words Sep 6th, 2011 6 Pages
Explain the principles behind cost benefit analysis. Is the use of cost benefit analysis essential in the appraisal of public spending? Discuss this in the light of a transport capital expenditure project with which you are familiar.
Cost–benefit analysis is often used by governments to evaluate the desirability of a given intervention. It is an analysis of the cost effectiveness of different alternatives in order to see whether the benefits outweigh the costs. The aim is to gauge the efficiency of the intervention relative to the present circumstances. The costs and benefits of the impacts of an intervention are evaluated in terms of the public's willingness to pay for them (benefits) or willingness to pay to avoid them (costs). Inputs
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* Distributional consequences: Costs and benefits mean different things to different income groups - benefits to the poor are usually worth more (or are they?). Those receiving benefits and those burdened with the costs of a project may not be the same. Are the losers to be compensated? To many economists, the equity issue is as important as the efficiency argument. * Social welfare is not the same as individual welfare - What we want individually may not be what we want collectively. Do we attach a different value to those who feel “passionately” about something (for example the building of new housing on Greenfield sites) contrasted with those who are more ambivalent? * Valuing the environment: How are we to place a value on public goods such as the environment where there is no market established for the valuation of “property rights” over environmental resources? How does one value “nuisance” and “aesthetic values”? * Valuing human life: Some measurements of benefits require the valuation of human life – many people are intrinsically opposed to any attempt to do this. This objection can be partly overcome if we focus instead on the probability of a project “reducing the risk of death” – and there are insurance markets in existence which tell us something about how much people value their health and life when they take out insurance policies. * Attitudes to risk – e.g. a cost benefit analysis of the effects of genetically

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