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CHAPTER 1: INTRODUCTION TO COST-BENEFIT ANALYSIS Purpose: To provide a non-technical overview of CBA. CBA IS A METHOD FOR DETERMINING SOCIAL COSTS AND BENEFITS Definition Cost-Benefit Analysis (CBA) is a policy assessment method that quantifies the value of policy consequences (usually called impacts) in monetary terms to all members of society. A CBA calculates net social benefits ( NSB ) for each policy alternative: net social benefits equal social benefits ( B ) minus social costs ( C ): NSB = B - C Two Arguments Against the Use of CBA: 1) Some dispute the fundamental assumptions of CBA (i.e. that the sum of individual utility should be maximized and that one can trade off utility gains and losses among people). They argue that there is no theoretical basis for making trade-offs between one person’s benefits and another person’s costs. 2) Public policy participants disagree about specific issues in CBA, such as how to monetize costs and benefits, what impacts are (especially over time), whether an impact is a cost or a benefit, and how to make trade-offs between the present and the future. THE PURPOSE AND USES OF CBA Purpose To help effective social decision making through efficient allocation of society’s resources when markets fail. When markets fail and resources are used inefficiently, CBA can be used to clarify which of the potential alternative programs, policies or projects (including the status quo) is the most efficient. Types of CBA: 1) Ex ante CBA – conducted prior to the intervention. Useful to show whether resources should be used on a program or project. 2) Ex post CBA – conducted at the end of the intervention. Provides information about the particular class of intervention. 3) In medias res CBA- conducted during the intervention. 4) Comparative CBA – compares the e x ante predictions to e x post results for the same project (very few of these comparisons have been conducted because the clients of e x post analyses are different from the clients of e x ante analyses). Boardman, Greenberg, Vining, Weimer / Cost-Benefit Analysis, 3 rd Edition Instructor's Manual 1-1
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Project-specific Decision Making Ex ante analysis is most useful for making resource allocation decisions. In medias res CBA analysis can also be used for this purpose, but ex post analysis is too late to divert resources to alternative uses. Learning About the Value of the Specific Project Ex post analysis is the most useful for looking at the efficiency of a particular project, then in medias res , then ex ante . The reason is that more is learned about the actual impacts of the project as time goes by. Learning About the Potential Benefits of Similar Projects
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