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Guide to Social Cost Benefit Analysis

Step 6: Assess the CBA: Is more research required?

How much to invest in a CBA

  • The question of how much expense or effort is put into a CBA should itself be subjected to some kind of cost benefit analysis.

170.CBAs can be done on the back of an envelope or they can involve empirical research costing in excess of $1 million. Thought needs to be given, therefore, to the kind of CBA that is appropriate in a given situation.

171.Indeed, a mini-CBA should be carried out for the CBA. What are the costs and benefits of carrying out a sophisticated CBA including field research, as opposed to a ‘desk-top’ CBA? The effort that is put into a CBA is likely to be proportional to the size of the project and to the scope for reducing uncertainty around the estimates.

172.Costs should be incurred in obtaining additional information on a project’s costs and benefits so long as they are exceeded by the value of doing so. The value of a CBA arises from avoiding bad decisions. For example, if a project that seems worthwhile is found, after carrying out a CBA, to have an NPV of negative $20 million, and the project does not proceed as a consequence of the CBA, then the value of the CBA is $20 million. If a project that seems worthwhile is found, after carrying out a CBA, to have an NPV of $20 million but another variant of the project is found to have an NPV of $30 million, then the value of the CBA is $10 million.

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