Cost-benefit analysis

Table of Contents
PART I
Scope and method

1 Brief historical background to cost-benefit analysis
2 What is cost-benefit analysis?
3 Framework to cost-benefit analysis

PART II
Basic concepts of benefits and costs

4 Measurements of consumer surplus
5 Consumer surplus when several prices change
6 Consumer surplus when other things change
7 Introduction to the compensating variation
8 Measurements of rent
9 Is producer surplus a rent?

PART III
Shadow prices and transfer payments

10 Introductory remarks
11 Opportunity cost of labour
12 Opportunity cost of unemployed labour
13 The additional benefits of using unemployed labour
14 The opportunity costs of imports
15 Transfer payments and double counting

PART IV
External effects

16 Introduction to external effects
17 Adverse spillovers
18 Internalizing externalities
19 Evaluating spillovers
20 Compensating for environmental damage

PART V
Investment criteria

21 Introduction to investment criteria
22 Crude investment criteria
23 The discounted present value criterion
24 The internal rate of return
25 The alleged superiority of the discounted present value criterion compared with the internal rate of return criterion and the net benefit ratio
26 Investment criteria in an ideal capital market
27 Calculation of rates of return and of time preference
28 Critique of the discounted present value criterion (I)
29 Critique of the discounted present value criterion (II)
30 The normalized compounded terminal value criterion (I)
31 The normalized compounded terminal value criterion (II)
32 The Pareto criterion and generational time
33 Cost-benefit analysis, weights and normative economics

PART VI
Uncertainty

34 Risk and certainty equivalence
35 Decision rules and heuristics (I)
36 Decision rules and heuristics (II)
37 How practical are decision rules and heuristics?
38 Simple probability in decision making
39 Mixed strategies in decision making
40 Four additional strategems for coping with uncertainty

PART VII
Topics frequently encountered in Cost-Benefit Analysis

41 Valuation issues and methods
42 Benefit transfers
43 Pair-wise comparison
44 Cost-benefit analysis and behavioural economics
45 Cost-benefit analysis in developing countries
46 The value of time
47 Measuring the benefits of recreational areas
48 Travel cost method
49 Cost-benefit analysis and public health
50 The value of statistical life
51 Estimating the economic cost of air pollution on health
52 Economic cost of diseases
53 Cost-benefit analysis and the problem of locating environmentally noxious facilities (NIMBYs) – an informal discussion

PART VIII
Further notes and advanced materials

54 Cost-benefit analysis and the economist
Appendix 1: Cost-effectiveness analysis
Appendix 2: The alleged contradiction of the Kaldor–Hicks criterion
Appendix 3: The problem of second–best
Appendix 4: Origins of the Hicksian measures of consumer surplus
Appendix 5: Marginal curve measures of consumer surplus
Appendix 6: The concept and measure of rent
Appendix 7: Marginal curve measures of rent
Appendix 8: The limited applicability of property rights
Appendix 9: Deadweight loss or love’s labour lost
Appendix 10: The value of human life
Appendix 11: The rate of time preference
Appendix 12: Selecting a set of investment projects for given political objectives
Appendix 13: Why cost-benefit analysis is useful for regulatory reform
Appendix 14: Valuing household production

Cost-benefit analysis (CBA) is the systematic and analytical process of comparing benefits and costs in evaluating the desirability of a project or programme – often of a social nature. It attempts to answer such questions as whether a proposed project is worthwhile, the optimal scale of a proposed project and the relevant constraints. CBA is fundamental to government decision making and is established as a formal technique for making informed decisions on the use of society’s scarce resources.

This timely sixth edition of the classic Cost-Benefit Analysis text continues to build on the successful approach of previous editions, with lucid explanation of key ideas, simple but effective expository short chapters and an appendix on various useful statistical and mathematical concepts and derivatives. The book examines important developments in the discipline, with relevant examples and illustrations as well as new and expanded chapters which build upon standard materials on CBA.