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Guide to Social Cost Benefit Analysis

Step 2: Identify who gains and who loses

  • All people in New Zealand affected by a policy should be recognised in the analysis.

13. Before identifying costs and benefits, it is useful to identify the people who are affected by a decision and whose costs and benefits should be taken into account in the CBA.

14. This guide is about undertaking a CBA from a national perspective rather than a government or departmental perspective. An analysis from a departmental perspective is termed a ‘financial analysis’ or ‘financial CBA’ and is described further below.

15. An analysis from a national perspective, often termed ‘economic Cost Benefit Analysis’, or ‘social Cost Benefit Analysis’, is preferred because the actions of one agency or department can impose costs or benefits on individuals or the nation as a whole (eg, increasing the size of a programme operated by a particular department may assist the operation of the department but may nonetheless require a large increase in income tax on individuals). The analysis should therefore look through entities, such as the government, to the people that are affected by decisions.

16. All people in New Zealand affected by a policy should be recognised in the analysis. This includes people in their role as taxpayers. However, there are situations where the definition of who is a gainer or loser is not straight-forward. Some of these are described here:

  • While in principle the focus should be on those ultimately affected rather than on intermediaries, there may be good grounds for believing that the impact on intermediaries is a reasonable proxy for the former. For example, a better road link that reduces transport costs may benefit a manufacturing company, but where there is competition, most or all of the benefit is likely to be passed on to consumers in the form of lower prices. The workers or shareholders of the manufacturing company may therefore not benefit themselves from the better road link, but the reduction in transport costs enjoyed by the company is a reasonable proxy for the impact on the final consumers (however, see discussion on primary and secondary markets on page 19).
  • Government sector CBAs are intended to measure the benefit to people in New Zealand. This means that benefits or costs that accrue to people outside New Zealand are generally ignored, on the grounds that the government only has responsibility for the well-being of those who are in New Zealand.
  • Future generations: the current generation has the prerogative to make decisions that could affect the welfare of future generations. The current generation may care about the welfare of future generations, but this is expressed through the current generation’s willingness to pay. This needs to be measured empirically or through the political process. There is little justification for an analyst to override the preferences of the current generation. Nor can an analyst predict the preferences of a future generation.

Transfer payments

17. It is usual practice to ignore gainers and losers who are parties to transfer payments, such as taxes, subsidies and welfare payments. This is merely for convenience, because the benefits to the recipients are assumed to offset the costs to the payers. The cash component of a transfer does not involve the creation or destruction of resources.

18. However, transfer payments usually have incentive effects and the welfare impacts of these should be taken into account. For example, if a welfare payment scheme induces a person to work less than the person would otherwise choose to, then there is an income loss that should be taken into account. This ‘deadweight cost' is discussed on page 15.

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