Cost–benefit analysis

Cost–benefit analysis (CBA) is a systematic approach used to assess the costs and benefits of a decision, project, or policy. It involves comparing the potential positive outcomes (benefits) with the associated costs to determine whether the benefits outweigh the costs and if the decision or project is economically justified. CBA is commonly used in economics, business, public policy, and project management to evaluate the feasibility and efficiency of various options.

Key aspects of cost–benefit analysis include:

* Identification of costs and benefits: CBA requires identifying and quantifying both the costs and benefits associated with a decision or project. Costs can include direct expenses, indirect costs, opportunity costs, and any negative impacts resulting from the decision. Benefits encompass positive outcomes, such as increased revenue, improved efficiency, environmental benefits, enhanced public health, or social welfare gains.

* Monetary valuation: CBA involves assigning monetary values to both costs and benefits, enabling comparison and aggregation. This valuation process requires estimating and converting non-monetary factors into monetary terms, which can be challenging for intangible or non-marketable goods.

* Time value of money: CBA considers the time value of money, recognising that costs and benefits occurring at different time points have different values. Future costs and benefits are discounted to their present value, reflecting the opportunity cost of capital and preferences for immediate benefits over delayed ones.

* Comparative analysis: CBA enables the comparison of different options or scenarios. It allows decision-makers to evaluate alternatives by assessing their respective costs and benefits, identifying the option with the highest net benefit or cost-effectiveness.

* Sensitivity analysis: CBA often includes sensitivity analysis to account for uncertainties and variations in the estimated costs and benefits. By conducting a sensitivity analysis, decision-makers can assess the impact of changes in key assumptions or variables on the overall outcome.

* Ethical considerations: CBA requires consideration of ethical and distributional concerns. It involves examining the equity and distributional implications of costs and benefits, ensuring that the analysis takes into account the well-being of different stakeholders and vulnerable groups.

Cost–benefit analysis provides a structured and quantitative framework for decision-making, helping to inform resource allocation, policy development, and investment decisions. It aids in identifying the most efficient and socially desirable options by considering both economic and non-economic factors.

However, the CBA also has limitations. It relies on assumptions, estimates, and simplifications that may introduce biases or uncertainties into the analysis. It can be challenging to assign monetary values to intangible or non-market goods, and the analysis may not capture all relevant factors or externalities.

Despite these limitations, cost-benefit analysis remains a valuable tool for decision-making, providing a systematic and transparent approach to evaluating the potential impacts of decisions, policies, or projects. It helps decision-makers weigh the pros and cons, make informed choices, and allocate resources efficiently to maximise overall societal welfare.

Cost–benefit analysis