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Guide to Social Cost Benefit Analysis

Introduction

  1. Significant decisions should be accompanied by some kind of CBA.
  2. A rough CBA is better than no CBA.
  3. A CBA is primarily about organising available information in a logical and methodical way.
  4. A CBA measures the impact of a decision on the public at large. It should attempt to be value-free. Different methods should be used to measure the extent to which a proposal fits with decision-makers' objectives and policies.

1. All decisions require some kind of formal or informal CBA. The main purpose of this guide is to encourage all decisions to be accompanied by at least a rough CBA, on the grounds that it is likely to be better than decision-making based on prejudice or instinct. But it should also encourage doing a more comprehensive CBA where the importance of the decision warrants it. This might entail employing specialists where an agency doesn’t have the necessary skills or resources in-house.

2. CBA is often rejected on the grounds that some benefits are hard to measure. While that is often true, a CBA is about organising in a logical and methodical way whatever information is available. And some information is always available. As this document will demonstrate, the purpose of CBA is not to calculate “the” benefits and “the” costs, but to reduce the degree of uncertainty that would otherwise exist around benefit estimates. There are a number of techniques for doing that. Without these, decision-makers would be left to rely on their own intuitions only, or worse, on the intuitions and prejudices of their advisors.

3. To emphasise this point, it is worth reflecting on the difficulty of intuitively estimating the total value of benefits that are spread across a large number of people, let alone comparing that value with a cost that may be in the tens of millions or even in the billions of dollars. These are sums that most of us have little experience with in our personal lives and find very hard to comprehend at an intuitive level. Systematic methods are therefore required for comparing the benefits and costs with each other.

4. A systematic method doesn’t necessarily need to be complex, detailed and expensive. Even a rough, back-of-the-envelope calculation can be logical and methodical. And as will be apparent from this guide, more can be measured than people often assume. A rough calculation may be a first approximation and may be better than nothing. If nothing else, it will give an indication of what is at stake and will help decide whether a more detailed CBA should be undertaken. Appendix 2 provides a worked example of a rough CBA.

5. The following are some points that are worth making at the outset:

  • When doing a CBA it is important to be mindful of what we are measuring. Government sector decision-makers need two kinds of information, which need to be analysed separately:
    • The extent to which a proposal fits with their objectives or policies. The answer is sometimes obvious, but if it is not then some kind of analysis may be required. A multi-criteria analysis (MCA) often lends itself to this.
    • How the decision impacts on the public at large. This is the domain of CBA. A CBA should be free of ethical or policy considerations [1].
  • An important feature of decision-making is that the economic impacts, i.e. the costs and the benefits, generally lie in the future. CBA is therefore a forecasting exercise. This has some important implications:
    • There is uncertainty around all estimates of future costs and benefits. The degree of uncertainty can be revealed by using ranges rather than point estimates.
    • The degree of uncertainty can be reduced by undertaking research. But this has a cost, so the question of how much research to undertake needs itself to be subjected to some kind of CBA.
    • Because costs and benefits are usually forecast to arise in different time periods and are often spread over a number of years, there is a need to reduce them to a single measure so they can be compared with each other. This can be accomplished by discounting them to a common point in time.
  • Costs and benefits can only be compared if they are expressed in the same measurement units. Money values are the most convenient for this purpose. While some costs or benefits are difficult to measure in money terms, economists have developed a number of techniques to indirectly infer their value in money terms.
  • One consequence of measuring costs and benefits in money terms is that it doesn't take into account the fact that money itself is worth more to some people than to others. Such ‘equity' issues are difficult for CBA to take into account. However, they shouldn't be ignored. This guide therefore recommends that equity or distributional consequences of decisions should be drawn to the attention of decision makers at the same time as providing information on the CBA.

Notes

  • [1]This is not to deny that analysts' perceptions are inevitably distorted by their own values. It is merely saying that when measuring the impact on the public, the endeavour should be to put one's own values or the values of decision-makers aside as far as possible, to the extent we are aware of them.
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