The Social Cost-Benefit Analysis

By Heerkens, Gary R. | PM Network, April 2012 | Go to article overview

The Social Cost-Benefit Analysis


Heerkens, Gary R., PM Network


You can even estimate the value of benefits on public-sector projects.

Performing a cost-benefit analysis (CBA) in companies that are in the business of making money is logical. But what about public-sector entities? After all, they're not generating revenues or trying to earn a profit. While public-sector projects obviously incur costs, the concept of monetary benefits is not as clear. Is a CBA even possible?

The answer is yes. In fact, there is a term commonly associated with this kind of analysis: social CBA. A surprising number of approaches have been developed that strive to estimate the monetary benefits associated with projects that address the needs of the public, such as safer highways, protection from epidemic flu, environmental protection and recreational facilities.

First, some critical terminology: In the private sector, a CBA is referred to as a financial analysis, as it compares the cost and benefit effects of a project on a specific company's financial position. But in the public sector, the CBA is referred to as an economic analysis because it typically considers the cost and benefit effects to the larger economy. Benefits accrue to the general population, or sometimes to a particular subset of the population.

VALUING THE BENEFITS OF PUBLIC-SECTOR PROJECTS

The economic benefit of a public-sector project is often established through a welldesigned survey process. Individual respondents are asked questions to determine how much value they would place on addressing a given situation. Hypothetical questions are asked as if each individual had to bear the cost burden. Most surveys revolve around one or more of these three variations:

Willingness to Pay (WTP): The amount of money people - as individuals - say they would consider a reasonable cash outlay to achieve some sort of desired outcome, such as cleaner air or a lower disease rate.

Willingness to Spend (WTS): What individuals say is a reasonable personal expenditure for something they would enjoy or appreciate, such as a reduction in traffic congestion or ready access to a high-quality recreational area.

Willingness to Accept (WTA): The amount of money people would want to receive as compensation to endure something bad or to forego a benefit, such as putting up with some level of pollution, or an increased level of personal harm or injury.

FROM URBAN PARKSTO ANTI-SMOKING CAMPAIGNS

Sanjay Gandhi National Park in Mumbai, India, the largest urban national park in the world, provides a good example. In the mid-1990s, its management faced significant financial challenges, and the park's potential as a recreational destination and natural habitat fell into decline. Something had to be done to turn this around - but would the local population consider such an effort economically justified?

In early 1995, a survey-based social CBA revealed how much the residents of Mumbai would be willing to pay to maintain the park and ensure its preservation. …

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