In making decisions about a specific housing project or policy any government faces the question as to whether the resources required to build/upgrade the housing, subsidise rents or provide better infrastructure and services could be used better for other purposes. The alternatives against which the project must be compared might lie elsewhere in the housing sector or in other sectors—agriculture, transport, health—of the economy. The nature of the alternatives is necessarily uncertain because governments are, of course, not able to identify all possible uses of public resources and then rank them in terms of their return to the economy and to the population in general. Equally, different uses of resources may benefit different sub-groups of the population, so that the choice between projects or policies may in part be a choice between directing the benefits of government action to people who differ in terms of their location, their sources of income, their standard of living and their composition of expenditure. Finally, the nature of the resources required for different projects may differ. Some projects may consume substantial amounts of capital or foreign exchange while others depend upon inputs of skilled labour or other scarce factors.
The role of cost-benefit analysis is to provide a consistent framework which may be used to compare such alternatives in deciding between competing demands on limited investment resources. In essence, cost-benefit analysis has developed as a method of decentralising the decisions which must be made in drawing up a programme of investments for a sector or for the whole economy. We might think in terms of attempting to draw up an optimal investment plan designed to reflect the government’s specific priorities as well as the constraints on the availability of various resources. Such an optimal investment plan