Social Cost Benefit Analysis

Social Cost Benefit Analysis Meaning, Features, Objectives

Table of Contents:

Meaning of Social Cost Benefit Analysis (SCBA)

Social Cost Benefit Analysis (SCBA) is a useful approach to assess whether decisions or choices that affect the use of scarce resources promote efficiency. Considering a specific policy and relevant alternatives, the analysis involves systematic identification of policy consequences, followed by valuation of social benefits and costs and then application of the appropriate decision criterion.

According to Littles and Mirrlees – It is not easy to draw a very clear difference between normal appraisal in the case of public sector projects and SCBA. But “if either accounting prices are used, or costs and benefits, which do not arise from the purchase and sale of what is normally reckoned as inputs and outputs are quantified in money terms and if the social value of the project is given a final quantitative expression, then we would say that SCBA was used”.

What is social cost-benefit analysis?

SCBA enables experts to measure, identify, and compare the positive social impacts and drawbacks of an investment project or program. A program involves a sequence of projects conducted over a specific duration, all aimed at achieving a particular objective. Public projects or private enterprises may be responsible for the project or projects at hand. It’s important to appraise both project types to establish their effectiveness in resource management. Projects that represent an efficient use of resources from a private viewpoint may generate costs and benefits that extend beyond the immediate private ownership.

For example, A private project can have various impacts, including tax contributions, job creation for the unemployed, and pollution generation. These effects are termed social benefits and costs, separating them from the project’s exclusively private expenditures and earnings. SCBA evaluates private projects from a societal perspective and is equally valuable for public projects. This approach can effectively examine how public policy modifications, like tax incentives, subsidies, or regulatory reforms, influence various factors.

Features of Social Cost Benefit Analysis

The features of SCBA are as follows:

1) It is alternatively termed Economic Analysis.

2) Allocation of resources to various sectors.

3) SCBA aids in evaluating individual projects.

4) This primarily serves the purpose of public investment.

5) It spells out broad national economic objectives.

6) SCBA is concerned with tactical decision making within the framework of broad strategic choices defined by planning at the macro level.

7) It offers a systematic approach to evaluate investments in projects within the context of the entire society’s economy.

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Objectives of Social Cost Benefit Analysis

SCBA aims to appraise the total impact that a project will have on the economy. Accordingly, SCBA focuses on the following objective that a project is expected to fulfil:

1) Justification of the use of scarce resources of the economy by the project.

2) Contribution of the project to the GDP (Gross Domestic Product) of the economy.

3) Contribution of the project in protecting/improving the environmental conditions.

4) Contribution of the project to improve the benefits to the poorer sections of society and to reduce the regional imbalances in growth and development.

Advantages of Social Cost Benefit Analysis

The primary advantages of SCBA over and above those of normal financial analysis are as follows:

1) Clarity of assumptions.

2) The focus is shifting away from personal and intuitive judgments.

3) This technique is applicable to a diverse range of project categories.

4) The ability to identify the projects that maximize the welfare of the community.

5) To attain the highest benefit, it’s important to rank and prioritize limited resources.

6) Exposure to the basis for decision-making for projects and the opportunity for public criticism.

7) Decentralized decision-making through the opportunity for community involvement and debate.

8) The ability to objectively assess and quantify the purpose of projects about community needs.

9) We need to acknowledge social costs and benefits, including environmental factors, which decisions often disregard.

10) The analysis of social factors allows us to evaluate projects considering factors other than pure financial profit.

Disadvantages of Social Cost Benefit Analysis

The primary disadvantages, limitations and pitfalls of SCBA are:

1) Complexity.

2) Overstatement of the value of social benefits.

3) Conflict between social welfare and financial justification.

4) False accuracy due to the use of money as a yardstick for comparison.

5) Difficulty in defining the limit for the assessment of impacts in the community.

6) Difficulty in measuring social costs and benefits and converting them into monetary terms.

7) Distributional effects are not properly considered, thus resulting in equity matters being overlooked.

8) Time and cost associated with research of social issues and the data needed to price them realistically.

9) Infinite (immeasurable) values relating to matters such as welfare, environmental quality and human life itself.

10) Mistaking of transfers between individuals or groups in the community as costs or benefits attributable to the project.

11) The Self-serving nature of the analysis is that it can be manipulated to justify politically attractive projects.

12) Double counting of costs or benefits through the inclusion of secondary effects, e.g., increased real estate values caused by travel time savings.

13) There are ongoing theoretical debates regarding the mechanics of this method. These include the selection of discount rates, how to handle distributional effects, and the significance of shadow pricing, among other aspects.

Social Cost Benefit Analysis

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