The fundamental principles of cost‐benefit analysis

Abstract

Abstract. Cost-benefit analysis is reducible to several major principles that collectively describe the assumption base, objectives, analytical tasks, and merits of this important project assessment methodology. Here, these principles are identified and described using basic economic terms and concepts. The deficiencies of cost-benefit analysis also emerge from these principles, and these issues are also observed in this article. Further discussion investigates high-profile issues in the economic assessment of environmental affects and the economic effects on sectors linked to water-project-impacted sectors. IntroductionOpposition among the stakeholders of proposed public projects can lead to confusion about what counts in the economic appraisal of such projects and how counted things are to be economically weighted. This confusion expands the latitude available to juxtaposed stakeholders and widens the breaches over which they contest. The result may be wasted resources and expensive delays for project decisions. Sometimes this problem seems to be confounded by economic analysts who, perhaps in their eagerness to assuage clients, quantify net benefits of dubious origin. Nonspecialists are undoubtedly perplexed by the array of benefits and costs that are claimed; yet better understanding can be obtained only by consulting sizable texts containing considerable notation and theory.The primary objective of this paper is to clarify these debates by synthesizing modern economic wisdom into the sharpest possible perspective on the proper conduct of cost-benefit analysis (CBA). The presentation strives to rely on basic economic concepts (such as supply and demand functions).In terms of project analysis, no method other than CBA enjoys as widespread application or analytical power. Costbenefit analysis has long served as an institutionalized component of federal decision making for water projects. In addition, the application of cost-benefit analysis to federal policy has been expanded in recent years to include regulatory rule making of many types, providing additional evidence of CBA's usefulness and power. Indeed, the notion that public policy, like public projects, should offer benefits in excess of costs has been embraced by recent Presidential administrations. are then enumerated and identified. A thesis of this paper is that the practice of cost-benefit analysis condenses to these eight guiding principles and that close attention to these directives resolves many issues that might arise in the performance of project evaluations. Moreover, it is argued that any flaws of cost-benefit analysis are necessarily rooted in these principles as well. Any other deficiencies are to be regarded as the result of incomplete or misguided analysis rather than the result of a faulty methodology. Foundations of Cost-Benefit AnalysisCost-benefit analysis is founded on a branch of economics In the United States during the 1900s, the relevance of welfare economics has been intimately tied to the desire for formal rules for deciding a...

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