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cost-benefit analysis

  An analytical procedure for the comprehensive, often pre-construction, economic evaluation of major public investment projects, embracing their full positive and negative societal consequences over the range of investment options. As such, cost-benefit analysis covers a wider range of considerations than does the profit-and-loss accounting of private-sector investment decision-making. Originally applied to public river and harbour projects in the USA, its contemporary uses extend to such diverse issues as urban air quality, dam and irrigation schemes, refuse recycling, transport deregulation, roadway maintenance, disposal of hazardous waste, choices among electricity generation systems, and job creation by regional policy (Armstrong and Taylor, 1993; see also Walshe and Daffern, 1990).

Cost-benefit analysis involves three stages. First, costs and benefits associated with public projects have to be identified, including intangible externalities such as noise and pollution. Second, these must be quantified, including their discounting to a common base date, since the various costs and benefits are often experienced over very different time periods. Finally, the resulting cost-benefit ratios are incorporated into the decision-making, or project-evaluation, stage, alongside political and other judgemental inputs.

Economists differ as to the appropriate ways to apply these general principles, and over the validity of the exercise as a whole. Defining all costs and benefits is one such: it is difficult to be comprehensive without double-counting. Not all variables have an easily determined market value, and some estimates may be little more than guesses. The discount value can be crucial to the outcome, and endangers undervaluing the welfare of future generations. Finally, distributional issues are important — a $1 million benefit to poor residents from one freeway route should outweigh a $1 million gain to rich citizens from an alternative one.

Recent extensions of cost-benefit analysis to large-scale environmental issues, such as global warming, have attracted considerable interest (e.g. Harley and Spash, 1993) but also raise particularly challenging difficulties. Not only are such potential environmental changes irreversible but the cost and benefits vary internationally, raise sharp ethical valuing judgements (e.g. over landscape and wildlife) and questions of intergenerational fairness — future generations will feel the sharp end of global changes, but may also have the necessary technology to combat them. (AGH)

References Armstrong, H.W. and Taylor, J. 1993: Regional economics and policy, 2nd edn. New York: Harvester Wheatsheaf. Harley, N. and Spash, C.L. 1993: Cost-benefit analysis and the environment. Aldershot: Edward Elgar. Walshe, G. and Daffern, P. 1990: Managing cost-benefit analysis. London: Macmillan.

Suggested Reading Schofield, J. 1987: Cost-benefit analysis in urban and regional planning. London: Allen and Unwin.



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