Some Considerations on Social Cost–Benefit Analysis as a Tool for Decision-making

Abstract

This chapter describes how social cost-benefit analysis (SCBA) seeks to evaluate all of the expected impacts of an option or a project on all the individuals of a society, not just the parties directly involved as consumers or procedures. The word social is used in the literature mainly to refer to this aspect of an SCBA. The analysis tends to be comprehensive. Every project effect that has a value for the individuals of the community concerned and that is related to scarcity, is systematically estimated and, wherever possible, given a monetary value. These valuations are rooted in the welfare theory and have a large tradition. In this theory it is assumed that individuals are the best judge of their own welfare. Projects are compared with a so-called “do minimum” alternative that implies the best possible solution of the problem with a minimum use of resources. In a cost-benefit analysis, welfare effects are estimated either on the basis of market prices or elicited from the behavior of economic agents in the market system. Benefits are based on the individual’s willingness-to-pay for a certain good or service. Costs are based on what economic agents are willing to receive as compensation for the supply of resources. Basically, a project is desirable if the benefits exceed the costs, with both benefits and costs suitably discounted over time. In this case, the winners will be able to compensate the losers and, potentially, everybody will be better off after the realization of the project.