Cost Benefit Analysis

Chapter 1
Boardman, Greenberg, Vining
and Weimer

Social Vs Individual CBA

CBA analysis included a systematic categorization of impacts as benefits (pro) and

costs (cons), valuing in dollars (assigning weights) and then determining the net
benefits of the proposal relative to the status quo (net benefits=B-C)

When individuals and costs talk of costs and benefits they mean there own costs
and benefits. In cost benefit analysis' we consider all of the costs and benefits to the
society as a whole. For this reason CBA is also referred to as social cost benefit
analysis.

NSB=B-C

There are disagreements with this definition of CBA. First social critics e.g. some
political economists, philosophers and some socialists etc have disputed the
utilitarian assumption of CBA i.e. that the sum of individual utilities should be
maximized and that it is possible to trade of utility gains for some against utility
losses for others.

These critics dont want to trade off between one persons befits and another's loss.

Second, Participants in the public policy making process e.g. bureaucrats and
politicians etc may disagree about the impact isuess,how to monetize them and how
to make trade offs between the present and the future.

The Purpose and Uses of CBA

The broad purpose of CBA is to help social decision making. The objective is to facilitate
more efficient allocation of society's resources.
Where markets work well there is an efficient allocation of resources, incase of market failures
govt intervention is required.
One must be able to demonstrate the superior efficiency of a particular intervention relative to
the alternatives, including the status quo. For this purpose the analysts use CBA.
Two major types of CBA
Ex ante CBA It is the standard CBA as the term is commonly used, it is conducted while the
project/policy is under consideration i.e. before it is started or implemented.
Assists in the decision to allocate scarce resources
Contribution to public policy decision making is direct, immediate and bureau specific.
Ex Post CBA it is conducted at the end of a project. At this time all the costs are sunk.
The value of ex post CBA is broader but less immediate as they provide information not only
about a particular intervention abut also about the class of such interventions.
They contribute to learning by govt managers, politicians and academics.
In medias res Analysis are performed during the course of the life of a project.
Like ex ante analysis they have the potential of influencing the decision to continue the
project.
Like ex post analyses they can be based on observation rather than prediction of some costs
and benefits.
Provides information to predict costs and benefits in future ex ante CBA.

Fourth type of CBA compared ex ante CBA and ex post (or in medias res)
CBA of the same project.
Useful to policymakers to learn about the efficacy of CBA as a decision
making andv evaluative tool.

Project specific Decision Making

In medias res analysis of an ongoing project can also be used for decision making purposes
where it is potentially feasible to shift resources to alternative projects.
May lead to discontinuation of service oriented program but rarely to termination of a physical
investment.
In the early stages of the project uncertainty about its actual impacts and about the true net
social benefits.
So In general ex post studies are more accurate than in medias res studies which are more
accurate than ex ante studies.
Learning About Potential benefits of Similar Projects
Ex post Analysis provides information not only about a particular policy intervention but also
about similar interventions.
Furthermore ex post and in medias res analysis contribute to learning whether a particular kind
of projects are worthwhile.
The potential for societal learning from in medias res and ex post analysis depends on the
extent to which the particular project being assessed can be replicated or serve as a general
model for other projects.

Learning about the Efficacy of CBA

Comparison of ex ante with in medias res or an ex post analyses is most

useful for learning about the value of CBA.
A comparison CBA provides information about the accuracy of the earlier
ex ante CBA which in turn provides guidance about the accuracy of future
ex ante analyses.
Information about the predictive ability of CBA is useful for decision making
purposes.
Comparison studies help analysts understand the reason for any
divergence between predicted and actual benefits or costs.

The Basic Steps of CBA: COQUIHALLA

HIGHWAY EXAMPLE

CBA may look complex, to make it simpler we divide it into nine

basic steps. The steps are illustrated using a simple example, the
construction of a new highway

Imagine that a cost benefit analyst who works for the Province of
British Columbia, Canada was asked to perform a CBA of a
proposed highway between the towns of Hope and Merritt. The
highway would be called Coquihalla Highway.

1. Specify the set of alternative projects

In this simple example the provincial government required the
analyst to consider only two alternative highways one with tolls
and one without, relative to the status quo. Provincial govt decided
the toll $40 for large trucks and $80 for cars.
But in reality the range of alternatives is huge . The highway
could vary on many dimensions including the following :

 continued

Changing the highway on just one of these dimensions would generate at

least one new alternative. Changing two or three simultaneously would
greatly increase the number of alternatives.
In general if there are n dimensions each with k possible values, there
would be K^n alternatives. For with 3 dimensions and three possible values
there will be 27 mutually exclusive alternatives. With four dimensions each
with three possible values there would be 81!.
Resources constraints mean that analysts typically analyze only a few (less
than six) alternatives.
CBA compares the net social benefits of investing resources in a particular
potential project with the net social benefits of a hypothetical project that
would be displaced if the project under evaluation were to proceed. The
displaced hypothetical project is sometimes called counter factual.
Sometimes the status quo is not a viable alternative.
If a project would displace a specific alternative rather than a hypothetical
one then it should be evaluated relative to the specific displaced
alternative.

Decide whose benefits and costs count (standing)

The analyst must decide whose benefit and costs should be counted.
In this example the analysts superiors in the provincial govt were in a
position to decide this and not the analyst. They wanted the analyses done
from the provincial perspective but also asked for a global perspective.
Often contentious whether an analysis should be performed from the
global, national, state (provincial) or local perspective.
Critics argue that many issues should be analyzed from a global
perspective eg enviromental issues.

Catalogue the impacts and select measurement indicators

This step requires to list the physical impacts of the alternatives as benefits
or costs and to specify the measurement indicators.
The impacts term is used broadly to include both inputs and outputs. For this
proposed Highway the anticipated beneficial impacts are
1. Time saved and reduced vehicle operating costs for travelers on the new
highway.
2. The value of the highway at the end of discounting period of 20 years.
3. Accidents avoided due to drivers switching to the shorter safer highway.
4. Reduced congestion on existing alternative routes
5. Revenues collected from tolls
6. Benefits accruing to new travelers.

The anticipated cost impacts are

1. Construction costs
2. Additional maintenance and snow removal
3. Toll collection
4. Toll booth construction and maintenance

Continued

Although the list of impacts appears comprehensive, critics might argue

that some relevant impacts are omitted.
From a CBA perspective, analysts are interested only in project impacts
that affect the utility of individuals with standing. Impacts that do not have
any value to human beings are not counted. CBA requires analysts to
identify the ways in which the project would make some individuals better
off e.g. through improved skills, better education or higher incomes.
Analysts should also include the negative environmental and congestion
impacts of growth.
To treat something as an impact we should know the cause and effect
relationship b/w some physical output of the project and the utility of
human beings with standing.
The identification and cataloguing of some potentially important impacts
may depend upon the state of scientific or social science knowledge.
Different groups of people view impacts in opposite ways.
There are no particular difficulties in specifying measurement indicators of
impacts in this category but sometimes the choice of indicator is not so
straightforward.
The choice of measurement indicator depends on data availability and
ease of monetization.

Predict the impacts quantitatively over the life of the project

The proposed highway has impacts that extend over time.

Predict for each alternative project the level of all impacts over the life of
that project and sometimes beyond it.
The analyst must make predictions for the no-tolls and with tolls
alternatives for each year and for each category of driver (trucks,
passenger cars etc) about
1.The number of vehicle trips on the new highway
2. The number of vehicle trips on the old road
3.The proportion of travelers from British Columbia
With these estimates and other info, the analyst cam estimate for the 195
km long highway
(a)Vehicle operating costs that users save
(b)The number of accidents avoided
(c)The number of lives saved

..continued

There are many difficulties in predicting impacts.

There are three reasons why prediction is difficult
(a) It is often difficult how individuals will respond to a change in even a
single program parameter.
Second a policy may affect the behavior of third parties in ways that
increase or decrease the costs or benefits of the policy
Third prediction may require scientific knowledge that is uncertain.