cost-benefit analysis

cost-benefit analysis A method of setting out the factors which need to be taken into account in making choices about major investments in public-sector projects. The objective is to assign monetary values to and weight all costs and all benefits, social and economic, so that one can see clearly whether the benefits exceed the costs of a venture. The method is normally applied to major public projects such as a new dam, airport, urban motorway, university, or a scheme for the unemployed, but the approach could in principle be applied to other private-sector investments or personal choices, as an aid to decision-making. The appraisal differs from commercial project appraisal because costs and benefits to all members of society are included—not only the monetary expenditures and receipts of the investor—so that, for example, environmental costs and the costs of social severance are included with other diffuse social costs and benefits.

The main difficulty with cost-benefit analysis is how to assign monetary values to social costs and benefits, especially when these affect different social groups, users and non-users of the proposed facility. The objection most often raised is that it gives a spurious air of economic rationality and objectivity to decisions that are necessarily social and political in nature.