15) cost benefit analysis

Question 1

What is CBA used for?

Answer 1

Economic agents weighing up the costs and benefits of projects ie infrastructural investments to decide whether there will be a net welfare gain to society

Question 2

How can CBA help governments?

Answer 2

May decide whether or not they intervene to correct market failure, eg if a good is currently under consumed or there is a free rider problem

Question 3

What must be identified for CBA?

Answer 3

Private and external costs and benefits, to determine the net social benefit (social benefit minus social cost)

Question 4

What examples are there of it being hard to put a value on ie externalities?

Answer 4

• tourism
• human life
• multiplier effect
• pollution
• congestion

Question 5

How does length of time/ inflation factor into CBA?

Answer 5

-CBA must take into the account the worth of money in the future to ensure that the value of what they are investing into is factored into how much value it will hold in the future

Question 6

What are the advantages of CBA?

Answer 6

• good way of assessing the various consequences of a project before work begins, to ensure it is a worthwhile investment
• in general, projects wont go ahead unless social benefit outweighs social costs

Question 7

What are the disadvantages of CBA?

Answer 7

• costs and benefits can be missed and therefore excluded from the net welfare change
• externalities can be difficult to put a monetary value on, so may be over or under valued and result in government failure
• inflationary factors will lower the value of investments overtime
• doesnt take into account equity, may be an overall social gain but might be concentrated towards higher earners
• political factors influenced decisions too