Cost Benefit Analysis
Cost-benefit analysis provides an organizational framework for identifying, quantifying, and comparing the costs and benefits (measured in dollars) of a proposed policy action. The final decision is informed (though not necessarily determined) by a comparison of the total costs and benefits.
Cost-benefit analysis is a tool for comparing the benefits of proposed projects with the costs to help users identify the alternative with the maximum net benefit (benefits minus costs). The more the benefits exceed the costs, the more society will benefit from the project activity or policy decision. There are four basic steps to performing a cost-benefit analysis:
- Identify the project or program and alternatives
- Describe quantitatively the inputs and outputs of each alternative
- Estimate the value of the costs and benefits
- Compare benefits and costs
Cost-benefit analysis, when done correctly, can give a manager a better understanding of the impact of alternative courses of action in terms of costs and benefits. This knowledge can help a manager identify alternatives that are the most beneficial, comparing projects that differ in magnitude and duration.
Cost-benefit analysis requires the conversion of all benefits and costs into common units - typically dollars. Because many environmental outputs cannot easily be measured in monetary terms, it may be possible to apply this tool in only a limited range of project decisions. Where it can be applied, however, cost-benefit analysis is an important tool for helping managers do the most environmental good with limited time, funding, and other resources at their disposal.
Compares costs and benefits using equal terms
Provides a clear indication of net cost or benefit of a specific area or regulation, helping justify decisions at various levels
Simplifies complex concepts and processes
Accepted by society more readily than other economic methods
Can be carried out at many levels (i.e., local, regional, national, international)
Can be difficult to determine accurately the discount rate of future costs and benefits, as well as indirect impacts
Often requires nonmarket valuation methods with varying degrees of complexity and accuracy
Costs are easier to estimate than benefits
Can be a time-consuming and expensive process
Does not always consider the source of the costs and benefits, needs to consider factors such as environmental justice and indirect impacts
Does not usually consider questions of environmental justice and how costs and benefits are distributed across different groups
This technique often requires some assistance from skilled experts or the use of specialized software that can analyze text for underlying meanings.
Related Tools and Methods
This website about cost-benefit analysis is maintained by Thayer Watkins, a professor of economics at San Jose State University.
Marine Protected Areas: Economic and Social Implications (PDF format)
A guide to better understanding of the economic and social values of marine protected areas. Discussions of benefits and costs, as well as economic and social tradeoffs are included.
Overview of Benefit Cost Analysis
Cost-benefit analysis is described and discussed in detail. Alternative methods, including cost-effectiveness analysis and incremental analysis, are described and examples of each are provided.
Generational Cost Benefit Analysis for Evaluating Marine Ecosystem Restoration
This guide from the Sea Around Us project explores cost benefit analysis with attention to the value for future generations for present restoration projects.