Cost-Benefit Analysis (CBA)

Cost-benefit analysis (CBA), is an economic decision-making tool that assesses whether a proposed project, action or policy is worthwhile. CBA can also determine the best choice among several alternatives. CBA weighs the total expected costs of each option against the total expected benefit. This comparison shows which benefit outweighs the costs and by how much.

Through CBA, the benefits of a given business-related action or project are added up, and then the cost associated with taking that action is subtracted. As an example, before building a new plant or beginning a new project, management will conduct a cost-benefit analysis to evaluate the costs of the project against the revenues that may be generated by the project. The outcome of the analysis will determine whether the project is profitable and feasible, or whether a different project should be pursued.

Costs can be defined either as ongoing or as one-time. Benefits are usually accrued over a period of time. The effects of time are incorporated into the analysis by calculating how long it would take to reach a break-even point, when the benefits that are reaped equal the costs of implementing the project.

In its basic form, cost-benefit analysis involves two factors: financial costs and monetary benefits. If a municipality wanted to do a cost-benefit analysis of building a new road, it would calculate the cost of building the road and subtract the economic benefits of improved transportation links. Neither the cost of damage to the environment nor the intangible advantages of faster and smoother road travel would be taken into account.

Cost-benefit analysis is also used to assess the social financial costs and advantages of a capital project over a certain period of time. Some principles of cost-benefit analysis are straightforward:

1. Appraisal of the project: This is an economic method extensively used to appraise business and government projects. A business would conduct a CBA to determine if, for example, it was considering investing in a new or updated information technology system.

2. Incorporating external considerations into the formula: These include the broader social impact of the project as well as environmental or even private economic costs and benefits that could affect the decision-making process.

3. Time is important: The cost-benefit analysis can take into account any economies of time through discounting. This factor can be significant when studying possible future effects on the environment.

Cost-benefit analyses that take into account social and environmental aspects have been used in large public works projects such as new highways, overpasses, tunnels, dams, bridges and power stations. One of the largest cost-benefit analyses was conducted before Terminal 5 was built at London's Heathrow Airport.

The fundamental principles of a cost-benefit analysis can be employed in many areas. Scenarios could include a mass immunization program using a new drug, a new system to improve railroad safety or the benefits of adding a new section to the railway. A cost-benefit analysis could be conducted when analyzing the introduction of congestion charges to reduce traffic in a city's downtown areas. Cost-benefit analyses are also relevant when evaluating the viability of producing genetically modified foods. Projects involving wind turbine farms and other sources of renewable energy could be subjected to a cost-benefit analysis.

Cost-benefit analysis can be conducted from different viewpoints. The analysis might take into account only the benefit and costs to the owners of the equity, i.e. the shareholders in a private firm. However, it can be broadened to include benefits and costs to all members of the group. The role of the decision-maker is then to determine whether X dollars worth of gain for one group justifies Y dollars worth of pain for another.

Cost-Benefit Analysis (CBA): Selected full-text books and articles

Rethinking Cost-Benefit Analysis By Adler, Matthew D.; Posner, Eric A The Yale Law Journal, Vol. 109, No. 2, November 1999
Meanings of the Market: The Free Market in Western Culture By James G. Carrier Berg Publishers, 1997
Librarian’s tip: Chap. 5 "Democracy under the Influence: Cost-Benefit Analysis in the United States"
Democracy, Social Values, and Public Policy By Milton M. Carrow; Robert Paul Churchill; Joseph J. Cordes Praeger Publishers, 1998
Librarian’s tip: Chap. 8 "The Ethics of Cost-Benefit Analysis: Incommensurable, Incompatible, and Incomparable Values"
Health Economics: Efficiency, Quality, and Equity By Steven R. Eastaugh Auburn House, 1992
Librarian’s tip: Chap. 11 "Cost-Effectiveness and Cost-Benefit Analysis"
Trust in Numbers: The Pursuit of Objectivity in Science and Public Life By Theodore M. Porter Princeton University Press, 1995
Librarian’s tip: Chap. Seven "U.S. Army Engineers and the Rise of Cost-Benefit Analysis"
The Public Economy of Urban Communities: Papers By Julius Margolis; Conference on Urban Public Expenditures Resources for the Future, 1965
Librarian’s tip: Chap. 11 "The Role of Rethinking Cost-Benefit Analysis in the Public Sector of Metropolitan Areas"
Collection and Recollections: Economic Papers and Their Provenance By I. M. D. Little Oxford University, 1999
Librarian’s tip: Includes discussion of Cost-Benefit Analysis in multiple chapters
Evaluation: A Systematic Approach By Peter H. Rossi; Howard E. Freeman; Sonia R. Wright Sage, 1979
Librarian’s tip: Discussion of Cost-Benefit Analysis begins on p. 247
The Complete Problem Solver By John R. Hayes Lawrence Erlbaum Associates, 1989 (2nd edition)
Librarian’s tip: Chap. 10 "Cost-Benefit Analysis"
Ecology, Policy, and Politics: Human Well-Being and the Natural World By John O'Neill Routledge, 1993
Librarian’s tip: Chap. 4 "The Constituency of Environmental Policy" and Chap. 5 "Justifying Cost-Benefit Analysis: Arguments from Welfare"
Regulating Health Care: The Struggle for Control By Arthur Levin Academy of Political Science, 1980
Librarian’s tip: "Cost-Benefit Analysis" begins on p. 137
Modern Public Economics By Raghbendra Jha Routledge, 1998
Librarian’s tip: Chap. 19 "Cost-Benefit Analysis"
The Economics of Climate Change By Anothony D. Owen; Nick Hanley Routledge, 2004
Librarian’s tip: Chap. 7 "Cost-Benefit Analysis and Climate Change"
Applied Environmental Economics: A GIS Approach to Cost-Benefit Analysis By Ian J. Bateman; Andrew A. Lovett; Julii S. Brainard Cambridge University Press, 2003
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