Cost Benefit Analysis

Cost Benefit Analyses are used by governments to discuss the private and social costs of major economic projects and determine whether or not they are the right course of action.  This is important because the spillover effects on third parties (externalities) can be substantial.

This method differs from private sector methods in 2 main ways:  Externalities are taken into account, and shadow prices are placed on costs and benefits where no market prices are available.

The Cost Benefit Analysis is comprised of 4 major stages:

1. Identification:  All relevant costs and benefits are established, both private and external (social costs and benefits). This can be controversial as there may be no clear physical or geographical cutoff.  The spillover effects may affect people beyond the vicinity of the proposed development.

2. Putting a monetary value on all relevant costs and benefits: This is straightforward where market prices are available.  Placing shadow prices on things like…