Cost Benefit Analysis Cba

Essay add: 22-10-2015, 20:34   /   Views: 169

Cost-Benefit Analysis estimates and sum up the equivalent money value of the benefits and costs to the community of projects to establish. These projects can be dams and highways or can be training programs and health care systems.Costbenefit analysis is often used by governments and other organizations, such as private sector or businesses, to evaluate the desirability of a given policy. It is an analysis of balance of benefits and costs, including an account of foregone alternatives and the existing state of matter.In economics benefit-cost analysis is a tool for proving, measuring and estimating the social benefits and costs of an investment, project or program. A program is a series of projects undertaken over a period of time with a particular purpose.The project may be public projects, accepted by the public sector or private projects.

Both types of projects need to determine whether they show a competent use of resources.Projects that show an efficient use of resources from a private opinion may involve costs and benefits to a wider range of individuals than their private owners. For example, a private project pay taxes, provide employment for the unemployed, and growing pollution.These are termed as social benefits and costs to recognize them from the good private costs and profit of the project. Social cost-benefit analysis is used to estimate private projects from either social point of view or public point of view.It is noticeable that the technique of social benefit-cost analysis can also be used to investigate the changes in public policies such as the tax/subsidy or regulatory plans.Public projects are often the provision of physical capital in the form of infrastructure such as bridges, highways and dams.

However there are other less apprehended types of physical projects that increase environmental capital stocks, and involve actions such as pollution control, land reclamation, fishery management and provision of parks.An investment project is a specific distribution of unknown resources at this time which will out flow in the future:For example labour, land and capital could be distributed to the construction of a dam which will result in increased electricity production in the future.The cost of the project is measured as an opportunity cost: the cost of goods and services which have been produced by the land, labour and capital production had not been used to construct the dam. The benefit of the project is estimate to determine the over electricity produced by the dam.

Definition of 'Cost-Benefit Analysis':

A measuring tool by which business decisions are examined, the benefits of a given project or business-related to action are measured and then the expense in taking that action are subtracted.Some consultants also made model to measure the cost value on unknown items, such as the benefits and costs associated with living in an identified town. Most analysts also measure opportunity cost into such equations.

Cost Benefit Analysis:

Cost-benefit analysis is a method of judging economic capability of projects. It compares the total benefits of a project with its total costs and suggests the accomplishing of the project, if benefits exceed the costs. The benefits and costs of a public project are evaluated from social perspective.

Example Cost Benefit Analysis

A Production Manager is proposing the purchase of a $1 Million stamping machine to increase output. Before he can present the proposal to the Vice President, he should know he needs some facts to support his purpose, so he decides to use cost-benefit analysis.He determines the number or amount of the benefits. With the new machine, he can produce 100 more units/hour. The three workers at that time doing the stamping by hand can be replaced.

The units will be higher quality because they are more regular. You are convinced these exceed the costs.There is a cost to purchase the machine and it consumes electricity. Any other costs are minor.He calculates the selling price of 100 additional units and multiplied by the number of production hours/month. Add to that 2% for the units that aren't refused because of the quality of the machine.

He also adds the monthly salaries of the three workers. That's a good total benefit.Then he calculates the monthly cost of the machine, by dividing the purchase price by 12 months/year and divides that by the 10 years the machine should last. The manufacturer's specs tells what is the power consumption of the machine and he can get power cost numbers from accounting so find out the cost of electricity to run the machine and add the purchase cost to get a total cost.He excludes the total cost from the total benefit and examination shows a heavy profit.

Now he can present it to the VP.

Importance of cost benefits analysis:

Importance of benefit-cost analysis to problems like nuclear radiation, an atomic waste, and the management of toxic substances in the different environmental fields estimates both the conceptual and quantification problems which resulted in water resource processes.

There are several following reasons:

Firstly, when water resource process involved in the rating of public goods, the majority of outputs from these projects are flood control, irrigation water, municipal, navigation enhancement, and industrial water supplies.These final products can be reasonably evaded on the basis of some type of market price knowledge because sometime private developments produce similar outputs. In the new application, we are dealing with circumstances in which profitable information from existing markets is difficult, if not impossible, to establish.Secondly, such matters as nuclear radiation and toxic materials link to exposure of the whole population or large subpopulations to very harmful effects they may be totally unaware.Thirdly, the issues involved in these actions deals with not only money benefits and costs, but the distribution of actual physical hazard.

For example, civilian of an industrial city may suffer ill health causing from pollution related to the production of goods consumed in other locality.Fourthly, we are often dealing with long-lived effects of a policy decision which could stretch out to hundreds of thousands of years and many human generations.This situation increases the rights and give prefer to future generations can be expressed in this decision action. The question is whether the simple desires of existing persons are to count totaly or whether justice demands that the present generation adopt some ethical rule or rules of an inherent nature in considering questions of future generations.

Implementation of Cost-benefit Analysis:

Cost benefit analysis is implemented on different sectors like industrial sector, health sector, social sector etc.Social Sector: Taking an example of a social sector, in constructing a public park the value of cost and benefit will be considered. If cost exceed from benefits the project will be rejected but if benefits increase the cost the project will be accepted.

Ecological Damages:

Even as clean-up efforts like removing toxins from the environment, it is possible that they could disturb fragile ecosystems or damage populations and threatened habitats.Activities such as removing wetlands and incinerating soil can pose hazards to animal life and vegetation.EPA seeks to avoid harming ecosystems through its correcting actions more than it would under the baseline of no action and offers guidance on greener clean-up that minimize water use, energy use, and other environmental impacts. Ecological damage is possible and is a potential social cost of clean-up efforts.

Health Risks:

Land cleanup technologies can involve waste excavation of contaminants that lead to temporary harmful airborne emissions.For example, Superfund sites undergoing remediation for lead contamination can release lead-enriched dust into the air. Cleanup activities can move pollutants that affect human health through other pathways such as soil excavation that contaminates surface or ground water.In addition to health risks in the community, clean-up workers can experience increased risks on-the-job. Superfund limits risks with legally safety plans that describe precautions and necessary equipment for site personnel.

How cost benefit analysis save the environment?

For environmental, health and safety regulation, benefits are defined in terms of having a clean environment or a safe workplace.

Costs should be measured in the same terms:

The losses showed by the increased prices that caused from the costs of meeting a regulatory aims. The costs manage to measure on the basis of direct compliance costs, with secondary consideration given to indirect costs, such as the total time of spent waiting in a motor vehicle inspection line.Moreover, a distribution of expenditures on environmental, health, and safety regulations has concern to save significant numbers of lives while using some resources.The estimated cost per statistical life saved has moved across regulations by a factor of more than $10 million, wandering from an estimated cost of $200,000 per statistical life saved with the Environmental Protection Agency's (EPA's) 1979. A reallocation of preferences in these regulations could save many lives at the given cost, or on other side, save the same number of lives at a much lower cost.

Principles on the appropriate use of benefit-cost analysis:

There are following six principles on the appropriate use of benefit-cost analysis:1) Benefit-cost analysis is effective for analyzing the favorable and unfavorable effects of policies. Benefit-cost analysis can help decision- makers better understand the involvement of decisions by identifying and, where appropriate, quantifying the favorable and unfavorable effects of a proposed policy change, even when information on benefits and costs, is unidentified. However, cost-benefit analysis cannot be used to estimate the economic benefits of an idea will exceed or fall of its costs, because there is simply uncertainty.2) Decision-makers should not stop from considering the economic costs and benefits of different policies in the development.

Agencies should be allowed to use economic analysis to help set regulatory priorities.Removing statutory prohibitions on the balancing of benefits and costs can help to promote more efficient and effective regulation.3) Benefit-cost analysis required for all big regulatory decisions. The precise definition of "major" requires judgment; this general requirement should be involve to all government agencies.

The scale of a benefit-cost analysis should depend on both the hazards involved and the likelihood that resulting information will affect the ultimate decision.For example, benefit-cost analyses of policies designed to be delayed or stop depletion of stratospheric ozone because of the large hazards involved and the potential for influencing public policy.4) Although agencies required to control benefit-cost analyses for big purposes and to give detail why they have chosen an actions for which evidence show that the expected benefits are less than expected costs, those agencies should not be bound by strict benefit-cost tests. Factors other than all economic benefit and costs, such as equity within and across generations, may be important in few decisions.5) A set of economic assumptions used in measuring benefits and costs.

Key variables include the social discount rate, the value of decreasing the risks of premature death and accidents, and the values related with other progresses in health.It is important to compare results across analyses, and a common set of economic assumptions increases the feasibility of such comparisons.A common set of suitable economic assumptions can increase the quality of individual analyses.The rate at which future benefits and costs should be discounted to present values generally not equal the rate of return on private investment.The discount rate should be based on how individuals trade off current for future consumption. Given uncertainties in identifying the correct discount rate, it is suitable to use a range of rates.

The same range of discount rates should be used in all regulatory analyses.6) Although benefit-cost analysis should focus basically on the overall relation between benefits and costs, a good analysis will also identify important distributional consequences.Given data often allow trustable estimation of major policy impacts on important subgroups of the population. On the other hand, environmental, health, and safety regulations are neither effective nor efficient tools for achieving redistribution goals.


Benefit-cost analysis can play an important role in legislative and regulatory policy debates on protecting and improving health, safety, and the natural environment.Although formal benefit-cost analysis should not be viewed as either necessary or enough for designing perceptible public policy, it can provide an exceptionally beneficial framework for consistently organizing different information, it can greatly improve the process and, hence the outcome of policy analysis. Benefit-cost analysis can be of great help to agencies involving in the development of environmental, health, and safety regulations and it can be useful in evaluating agency decision-making and in shaping statutes.

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