2 Identifying and Estimating Relevant Costs and Benefits
Cost Benefit Analysis (CBA) is a tool to aid decision making. Identifying and estimating all relevant costs and benefits helps provide a consistent basis for the comparison of alternative proposals. Ideally CBA will demonstrate that the expected benefits of a given proposal exceed the expected costs. That is, to determine if there is a net benefit. If the net benefit is greater than zero then the proposal may be worthwhile pursuing.[14] This chapter looks at which costs and benefits to include and how these are assigned monetary values.
This sounds straightforward. But how are items such as taxes, inflation, and intangibles treated? Intangibles are benefits and costs associated with a proposal that either cannot be quantified, or are difficult to quantify in monetary terms. For example, how would you assess the value of a health programme that improves New Zealanders’ health status and quality of life over time? When thinking about some of these more complex issues, the need to be consistent and avoid double-counting cannot be emphasised enough. This chapter provides guidance on these issues.
It is also useful to consider Cost Benefit Analysis as a series of steps:
- Confirm desired outcomes of the proposal(s)[15]
- Establish the assumptions and scope underlying the analysis
- Decide an appropriate period for the analysis (often termed the ‘appraisal period’)
- Identify all significant benefits and costs, and provide assurance that these will be realised
- Assign monetary values to the benefits and costs wherever possible[16]
- Discount the benefits and costs to present values (see chapter 3)
- Assess risk, and uncertainty (see chapter 4)
- Consider the effect of any intangible costs and benefits that could not be reliably assigned monetary values (chapter 4)
- Select the preferred proposal (see chapter 5).
Notes
- [14]Other considerations in the decision include: appropriateness of government intervention; the attractiveness of competing proposals/uses of funding; strategic value; affordability; the importance of possible intangible costs/benefits; and any implementation difficulties.
- [15]For example, see http://io.ssc.govt.nz/pathfinder/documents/pathfinder-BB1-identify_ocs.pdf.
- [16]In a national context, benefits and costs are often termed social benefits and social costs.
