10.2 Cost-Benefit Analysis
Cost-benefit analysis attempts to count all of the costs of projects and evaluate all of the benefits that result. In the simplest case, cost-benefit analysis directly compares outlays with the benefits that result. If you buy something for $100 today and you know you can sell it tomorrow for $120, it is easy to see that the cost was less than the benefit and the cost-benefit ratio of this little buy- and-sell project was less than 1. For a complex project involving a new technology, the measurement of costs and benefits will be a lot more complicated.
Cost-benefit analysis usually is associated with public projects. Projects like new highways should bring more benefits than the outlays of public money to complete them. The concept also can be applied to things other than construction. For example, new regulations may be subjected to cost-benefit analysis that includes both the public and private expenditures they imply as well as estimates of the financial good that they will do. Such studies can be controversial. Important variables often are not easily measured, and the resulting approximations can be easily affected by bias. For example, politicians and business interests may exaggerate the benefits of a dam while underestimating the cost of the environmental impacts that the project entails. Nevertheless, most societies recognize that evaluating costs and benefits is the right thing to do, even if the implementation is far from perfect.
10.2.1 Cost-Benefit ...