- noun the process of comparing the costs and benefits of various possible ways of using available resources.
- noun an examination of the ratio between total social costs and total social benefits, especially in considering large-scale public building programmes. The externalities involved can be costs such as pollution and benefits such as better access to markets; if social costs are less than social benefits then the construction programme can be justified.
- (written as Cost-Benefit Analysis)
A method of comparing the costs and the (money-valued) benefits of alternative courses of action. It usually requires the calculation of present values using a social discount rate. It entails the systematic comparison of all those relevant costs and benefits of proposed alternative schemes with a view to determining (1) which scheme, or size of scheme, or combination of schemes, maximizes the difference between benefits and costs, or (2) the magnitude of the benefit that can result from schemes having various costs. The concept of cost or benefit employed is sometimes that of social cost or benefit. However, in other cases the scope of the cost and benefit concepts is defined by the interests of the clients for whom the analysis is conducted after discussion between clients and analysts about the options to be considered and the objectives to be sought. This defines what is known as the perspective of the study.
The virtues of explicitness (in the objectives postulated, the as sumptions and methods adopted) and consistency (the principle that decisions between alternatives should be consistent with objectives) are common to all forms of cost-benefit analysis. Beyond these, however, there are two broad perspectives that analysts may follow: one is often termed the 'social decision-maker's' perspective and the other the 'societal' perspective. Under the social decision-maker's approach, the analyst addresses the question of concern to the decision-maker (which may in practice take considerable eliciting) and adopts the decision-maker's values. This way of approaching the cost-benefit analyst's task is somewhat akin to a consultant's role, the social decision-maker being the client. The other approach in volves the analyst in stipulating the social objectives and making the necessary value judgments (or making a value judgment about where they might be obtained other than from decision-makers). In this role the analyst is somewhat distanced from those who make decisions, which may on the one hand have the useful consequence of exposing some choices that a decision-maker may prefer to leave unexposed but, on the other, may result in the fruits of the analysis gathering dust on someone's shelves if the judgments in question prove unacceptable or irrelevant. The former approach is sometimes characterized as being consistent with extra-welfarism, perhaps because the client may reject welfarism, though there is no particular reason why the analyst adopting the second approach should not also take an extra-welfarist view.
Making value judgments explicit is inherent in the practice of cost-benefit analysis. In addition to choosing the perspective, other critical choices, all of which involve making value judgments on behalf of society, usually include: choice of outcome measure (and if complex, like ' health gain ', its constituents, reasonable measures of it, its construct validity, its scaling and combining with other elements both at a point in time and over time); choice of cost measure; and matters concerning the distribution and weighting (geographical, between patient or disease groups, ages and sexes, etc.) of consequences, whether costs or benefits. To treat these weights as 'equal' is, of course, not to escape making a value judgment: it is to value them equally.
Explicitness in cost-benefit analysis also extends to the treatment of uncertainty. It is usually a good idea to identify separately uncertainty in relation to the parameters of parts of the analysis and uncertainty in relation to the data themselves.
The usual decision rule in cost-benefit analysis is for the bene fit-cost ratio (B/C) to exceed unity or for (B - C) > 0.
Information & Library Science
- noun an investigation of the level of benefit gained from something to decide whether it is worth the expenditure
- noun analysis that compares the costs and benefits of different ways of using available resources