This book is intended for people with a basic understanding of elementary economics who wish to learn how to conduct a social cost-benefit analysis. We use the term social benefit-cost analysis to refer to the appraisal of a private or public project from a public interest viewpoint. We follow professional practice in using the terms benefit-cost analysis and cost-benefit analysis (with or without the social prefix) interchangeably.
A social cost-benefit analysis of a publicly funded project may be commissioned by a municipal, state or federal government, or by an international agency such as the World Bank, IMF, UN or OECD. Proponents of private projects which have significant social impacts may also commission an economic analysis of this type in order to support an application for approval to proceed with the project. Sometimes the scope of the required analysis is broader than the evaluation of economic benefits and costs: an impact analysis may also be required to determine the effects of the project on employment and economic growth; an environmental impact statement may be required; and a social impact analysis dealing with factors such as crime and impacts on families may be sought. This book concerns itself mainly with the economic benefits and costs of projects, although it does touch on the question of economic impact. The main questions addressed are: Do the benefits of the project exceed the costs, no matter how widely they are spread? And which group benefits and which bears the costs?
Social cost-benefit analysis relies mainly on microeconomic theory, although some understanding of macroeconomics is also useful. The person whose background should be sufficient to allow them to benefit from this book is someone who did a principles of economics subject as part of a commerce, arts, science or engineering degree; a person with an undergraduate economics training will find the organizational principles set out in the book to be innovative and of considerable practical use.
The book has several unique features: the close integration of spreadsheet analysis with analytical principles is a feature of some financial appraisal texts, but is unusual in social benefit-cost analysis; the particular layout of the spreadsheet is unique in offering an invaluable cross-check on the accuracy of the appraisal; and the book is structured in a way that allows readers to choose the level of analysis which is relevant to their own purposes.
The book emphasizes practical application. It develops a template based on spreadsheet analysis which is recommended for use in conducting a social cost-benefit analysis and which provides a check on the accuracy of the analysis. The template is presented in the form of a case study of a social cost-benefit analysis of a proposed private investment project in a developing economy. The case study, together with reference to the necessary economic principles, is developed stage by stage in Part 1 of the book, consisting of the first six Chapters. At the completion of Part 1 the reader should be capable of undertaking a cost-benefit analysis of an actual project.
Part 2 of the book introduces some complications which were ignored in Part 1: input or output price changes caused by the project under analysis; imperfections in foreign exchange markets; risk; and the cost of public funds. The analysis of many projects does not require consideration of these matters, and because they tend to be a little more complicated they are deferred to this second Part of the book. The treatment of these issues in practical benefit-cost analysis is illustrated by amendments to the case study developed in Part 1.