Cost Benefit Analysis

Overview

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.

General Information

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

Application

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.

Strengths

  • 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)

Limitations

  • 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

Expertise Needed

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

Interviews are a method of eliciting answers to predetermined questions from one individual at a time. This method is used for gathering specific pieces of data for information analysis.
A standardized list of questions that may be administered formally or informally by mail, telephone, Internet, or in person to collect specific information from multiple individuals.

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