·
A method of decision making which attempts to
take into account social costs and benefits and private costs and benefits of a
given project.
·
Tries to place a monetary value on all benefits arising from a project, then
compares the total value with the project’s total costs.
·
An approval
technique à
used to decide whether the project will go ahead or not
·
Incorporates
externalities
Uses
·
Public
projects: airports, roads, motorways, bridges, tunnels, dam...
·
Public
health programmes: mass immunisation (e.g. preparing for swine flu, even
though vaccinations were not required in mass scale, CBA could have been used
to decide if this was the best option)
·
Introduction of congestions charge in London
·
Investment in environmental projects (e.g. wind farms)
Stages of CBA
1a. Calculate social costs and benefits (externalities)
b. How likely is the
outcome of the cost/benefit calculated? Uncertainties?
2. Discounting the
future: Calculate the monetary value now of costs and benefits expected in
the future. Monetary value falls over time (because of inflation) therefore
costs/benefits will be lower. Individuals also enjoy benefits now rather than
later, leading to a fall in the value of costs/benefits for the future.
3. Compare costs to benefits to determine the net social rate of return.
4. Compare the net rate of return with different projects
and decide which ones should go ahead.
Price shadowing:
Prices being put on economic activities where there is no market price –
artificial prices. They are used to reflect the time social costs and benefits,
because charged prices do no always reflect the true marginal social cost of
resources.
Criticisms of CBA
·
Putting a monetary value on externalities since
they are delivered and received outside the market and have no market price.
E.g. impact on environment.
·
Problems choosing the rate at which to discount
the future and setting shadow prices accurately
·
Not all stakeholders are taken into account when
calculating costs and benefits. E.g. non human stakeholders and future
generations
·
Future costs and benefits are hard to forecast
due to demand and supply changes, population, inflation rate, development of
new technologies…
·
The costs and benefits are different to
different income groups
·
A benefit to one party could be considered a
cost to another, creating the need for value judgements and sometimes bias
·
The decision made to go ahead with a project is
on the basis that benefits exceed costs, therefore the costs of the project are
by passed
·
‘Impartial experts’ making wrong decisions
·
Argued to be a ‘job creation scheme’ for
economists and planners and a waste of time
·
Valuing human lives, for example for a proposed
new road crossing. Is there a morality to calculating the value of someone’s
life?
Case Study
The CBA was used with Heathrow Terminal 5
For:
Economic growth, jobs, increase competitiveness, boost
economy, transport links improved, building on Brownfield sites.
Against:
More flights à more noise, traffic congestion, more air pollution,
effects of wildlife
CBA was also used when deciding whether to have a national
smoking ban in public places in 2004 in the UK
