Econ 225 Chapter 6
Benefit cost analysis is to the public sector and social valuations what a
profit and loss analysis is to a private-sector firm
1. Benefit cost analysis is a tool for helping to make public decisions-
what policies and programs to introduce-done from the standpoint of
society in general rather than that from of a single profit making firm
2. It incorporates social valuation of all inputs and outputs related to the
project whether or not they are transacted in private markets.
A major challenge of benefit cost analysis is how to value non-market costs
Some criticisms of using benefit cost analysis for environmental decision
-public agencies only use benefit-cost analysis in ways that would help them
justify ever-larger budgets.
-benefit-cost analysis is really an attempt to short-circuit the process of
political discussion and decision that should take place around prospective
public projects and programs
-is a way of curtailing public programs because of the difficulty of measuring
benefits relative to costs.
1. specify clearly the project or program, including its scale and the
perspective of study
2. describe quantitatively the inputs and outputs of the program
3. estimate the social costs and benefits of these inputs and outputs
4. compare the benefits and costs
2 types of public environmental programs for which benefit cost analysis is
1. Physical projects, that involve direct public production ex public waste
2. Regulatory programs, aimed at enforcing environmental laws and
The socially efficient scale is maximized where MAC=MD
If it is hard to create a graph a sensitivity analysis is conducted. This involves
recalculating the benefits and costs of a policy or project using different
assumptions about key variables.
If the project lasts more than a year we must discount any future costs and
benefits before computing net benefits