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Lectures-17-19-CBA 1

The document discusses cost-benefit analysis (CBA). It provides a brief history of CBA dating back to 1844. It then defines CBA as quantifying the costs and benefits of a decision over a period to allow for comparison of alternatives. The purpose of CBA is to inform decision making by determining if a project or policy is worthwhile based on trade-offs. The key steps of CBA involve identifying and valuing both monetary and non-monetary costs and benefits to compare alternatives and determine the option with the highest net benefit. Sensitivity analysis is also an important part of CBA to account for uncertainty.

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Dimpsy May
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9 views

Lectures-17-19-CBA 1

The document discusses cost-benefit analysis (CBA). It provides a brief history of CBA dating back to 1844. It then defines CBA as quantifying the costs and benefits of a decision over a period to allow for comparison of alternatives. The purpose of CBA is to inform decision making by determining if a project or policy is worthwhile based on trade-offs. The key steps of CBA involve identifying and valuing both monetary and non-monetary costs and benefits to compare alternatives and determine the option with the highest net benefit. Sensitivity analysis is also an important part of CBA to account for uncertainty.

Uploaded by

Dimpsy May
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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COST BENEFIT ANALYSIS

• History: The origins of CBA go back to 1844, the founding father, a


French engineer, Jules Dupuit - costs and benefits of constructing a
bridge, water pricing

• CBA – Process of quantifying costs and benefits of a decision (over a


certain period), and those of its alternatives (within the same period),
in order to have a single scale of comparison for unbiased evaluation

• CBA conducted on Projects, programs and / or policy analysis


COST BENEFIT ANALYSIS

Purpose:
• To assist / inform project / public policy decision making if
a project / program / policy is worthwhile;
– it is not meant to supplant the decision making process
• It does not provide definitive answers – only informs public
decision, i.e., If ……. What…………?
• It makes clear the trade-offs that decision makers face
 The ultimate goal is to ensure that resources are put to
the most valued uses
Cost benefit analysis

• Logic and applications of CBA:


– Identify both gains (benefits) and losses (costs) from the
proposed action
– Calculate the benefits and costs of each alternative
• Do the benefits outweigh the costs?
• Accept a policy if B > C
Compare different policies: Given alternative policies that
could achieve the same goal, which policy should be
undertaken?
Cost benefit analysis
Steps in Cost-Benefit Analysis: the project cycle

• Determine the policy boundary – avoid wrong attribution

• Identification and quantification of impacts: impact pathways -


costs and benefits

• Estimate the monetary values of costs and benefits

• Compute the decision metric

• Undertake sensitivity analysis: risk & uncertainty


• Sensitivity analysis – involves varying the values of
parameters about which there is uncertainty, to see if that
will change any conclusions
Cost benefit analysis
Steps in CBA: Sensitivity analysis

• Changing the key and uncertain parameters:


• The discount rate;
• Estimates of inputs (eg. Labor);
• Estimates of output – yield;
• Prices of inputs and output;
• External costs and benefits;
• Do the results / conclusions change?
Cost benefit analysis

The challenge is - how to measure the “benefits” and


“costs”?

• In economics, the system of measurement is


“anthropocentric” - human centered

– All benefits and costs are valued in terms of their


effect on humanity

• In ecology and related fields – the system of


measurement is “bio-centric” – bio-physical, aesthetic,
cultural, spiritual, educational and ethical values
Cost benefit analysis

Costs are relatively easy to estimate in Rand terms:


– The additional cost of producing oil-efficient diesel engines
– The additional costs and foregone revenues associated with
certified sustainable timber harvest methods
– The reduced commercial fishing revenues due to more
stringent fishing regulations
– The foregone benefits of switching to organic farming
– The opportunity cost of using traditional crop varieties
Cost benefit analysis

Benefits are more difficult to estimate in Rand terms: examples


– The improvements in human health associated with less
pollution; health benefits of medical discoveries – valuing
human life?
– The watershed benefits associated with certified sustainable
timber harvest methods
– The ecological and future gains to stocks associated with
more stringent fishing regulations
– The environmental benefits of organic farming
– The value (to society) of using traditional crop varieties
Cost benefit analysis

• To do CBA, the “apples and oranges” of benefits and costs


must be placed on a common metric, which is often money
• Once we have the flow of benefits and costs in a common
metric, we calculate the decision measures (NPV, IRR, B/C
ratio etc.) using the appropriate “r”

Example:
( Bt − Ct )
=
n n n
NPV =  Bt t -  Ct
t=o (1 + r ) t= o (1 + r )
t
t =0 (1 + r ) t
Cost benefit analysis

Three levels of CBA


A. Private CBA – boundary - private investor
Financial / private CBA is done:
• Using market prices of inputs and outputs
• Boundary - investor or the ultimate beneficiary
• For profit oriented projects
• Costs & benefits - only those expressed in money
terms
AGEC270

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