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Guide to Social Cost Benefit Analysis

Step 4: Value the costs and benefits

  • Benefits should be measured in terms of ‘willingness to pay', and costs should reflect opportunity costs.
  • Values should be adjusted for risk.
  • Values should be expressed in terms of ranges.
  • The evaluation period should be ‘whole of life'.
  • Benefits and costs should be measured in real terms, i.e. net of inflation.
  • Multiplier effects should be ignored, unless there is high unemployment.

44. The previous three steps only require thinking and familiarisation with the issue, and should be carried out for all CBAs. Valuation of costs and benefits, however, is usually more difficult. But this is not a reason not to make an attempt. Even a rough, back-of-the-envelope attempt will convey some useful information to decision-makers. In fact, just identifying the main costs and benefits, and summarising them in a table on one page, often reveals surprisingly useful information. In other words, a ‘rough' CBA is better than no CBA.

45. More information on how to do a rough CBA is provided on page 45 and a worked example in appendix 2.

Measure of Value: Willingness to pay

46. People's willingness to pay for a service (or ‘willingness to accept' payment as compensation for suffering a disadvantage, eg exposure to pollution) reflects their ordering of preferences; that is to say, if they are prepared to pay more for one service than for another, then it seems reasonable to infer that the first service impacts more positively on people's welfare (or at least on their perception of their own welfare). Using willingness to pay (or accept payment) measured in dollars, therefore ensures that all costs and benefits of all project alternatives are compared using a common yardstick.

47. While it is recognised that willingness to pay depends on ability to pay, any ethical or equity issues that arise should be noted in the CBA report and on the summary CBA table, but should be discussed separately. It is generally not practical to attempt to quantify them and include them in the numerical evaluation.

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