Cost Benefit Analysis

Abstract

Cost benefit analysis compares policy strategies not only on the basis of their financial flows but also on the basis of their overall impact, be it economic, social, or environmental (Sect. 9.1). To do so, the approach relies on the concepts of Pareto-optimality and Kaldor-Hicks compensation to assess whether public programs are globally beneficial or detrimental to society’s welfare (Sect. 9.2). All effects must be expressed in terms of their equivalent money values and discounted based on how society values the well-being of future generations (Sect. 9.3). Using conversion factors, the cost benefit analysis methodology also ensures that the price of inputs and outputs used in the analysis reflects their true economic values (Sect. 9.4). Last, the analysis ends with a deterministic or probabilistic sensitivity analysis which examines how the conclusions of the study change with variations in cash flows, assumptions, or the manner in which the evaluation is set up (Sects. 9.5 and 9.6). One may also employ a mean-variance analysis to compare the performance and risk of each competing strategy (Sect. 9.7). Applications and examples, provided on spreadsheets and R-CRAN, will enable the reader to take the methodology in hand.