CBA

Question 1

CBA

Answer 1

an investment appraisal technique that takes into account all private and external costs and benefits of an economic decision

Question 2

External costs and benefits

Answer 2

May be hard to quantify since investment projects has a wide range of consequences affecting people beyond a specific location

Question 3

Net social product

Answer 3

Difference between social costs and social benefit

If the MSB > MSC then the project is worthwhile since it provides an overall net benefit for society

Stage 1 - identify all costs and benefits

Stage 2 - give a monetary value shadow pricing may be needed

Stage 3 - use statistical forecasting techniques to estimate costs and benefits over many ears where projects have lasting impacts

Stage 4 - drawing together the data from the previous sages to compare social costs and benefits

Question 4

Problems with CBA

Answer 4

may not fully reflect the distributional impacts of investment projects, a new shopping centre may provide external costs locally but external benefits because of job creation

Public sector projects are often controversial and may attract objection from pressure groups

CBA may be ignored for political reasons with the eventual choice of project not being the one recommended by economists

difficult to accurately place value on public goods such as the environment where there is no market established for the valuation of property rights