Cost-Benefit Analysis

Abstract

In Chapter 2 it has been shown that according to Neo-Classical economic theory, decision processes are based on two premises. The maximisation premise on behaviour states that “economic men” (individuals and groups) try to maximise their objective function (especially welfare for individuals and profit for enterprises) and individual welfare judgements are the ultimate criterion. The weighting premise on evaluation states that all relevant changes as a consequence of economic decisions can be expressed in a welfare-related, one-dimensional entity, so that costs and benefits of all alternatives can be reduced to neat (ordinal) balance figures that can be ranked. These two premises imply the use of monetary evaluation methods. A monetary evaluation is characterised by an attempt to measure all effects in monetary units, whereas a non-monetary evaluation utilises a wide variety of measurement units to asses the effects. Cost-benefit analysis and cost-effectiveness analysis are well-known examples of a monetary evaluation.