Introduction to
Benefit-Cost
Analysis
MARK JEFREY SAUQUILLO
GUIA MANELLE CAMANDANG
CLARENCE ANTONIO
“Information is a source of learning. But unless it
is organized, processed, and available to the right
people in a format for decision making, it is a
burden, not a benefit.”
— WILLIAM POLLARD
What is Benefit-Cost Analysis
is a systematic process that businesses use
to analyze which decisions to make and
which to forgo. The cost-benefit analyst sums
the potential rewards expected from a situation
or action and then subtracts the total costs
associated with taking that action
Application in My Field of Work
Benefit-Cost Analysis (BCA) is a method
that determines the future risk reduction
benefits of a hazard mitigation project and
compares those benefits to its costs. The
result is a Benefit-Cost Ratio
The Process of Benefit-cost
Analysis
Process of Cost-Benefit Analysis
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
DEFINE THE PROBLEM
ASSEMBLE EVIDENCE
SELECT CRITERIA FOR MAKING THE DECISION
IDENTIFY THE POLICY ALTERNATIVES TO BE
CONSIDERED
PREDICT THE OUTCOME OF EACH ALTERNATIVE
CONFRONT THE TRADE-OFFS
MAKE RECOMMENDATIONS
TELL YOUR STORY
Identifying the goals of the
policy
The goal of most public policies is to reduce, eliminate, or
prevent a particular social or economic problem.
Therefore, any convincing policy analysis should have
clear and detailed answers to a seemingly simple set of
questions: What is the problem? When, where, and how
often does the problem occur? What are the causes of
the problem? How serious are the harms caused by
the problem?
Assembling information and
evidence
Research now begins with a search of electronic sources
such as online library catalogs and databases of academic
or professional literature. It is also common to use
unguided Web searches by typing keywords into a Web
browser. Reliance on this unguided approach is not
appropriate for serious research because of the existence
of many unprofessional, ideologically biased, or
fundraising websites associated with nearly any topic.
Assembling information and
evidence
Identifying the seriousness of the problem involves
quantifying both the number of people affected by the
problem and the intensity of harm suffered by those
people.
Policy alternatives and decision
criteria
The most common rule for analyzing policy alternatives is
the Kaldor-Hicks criterion or fundamental rule of policy
analysis. This rule leads the analyst to rank projects
according to their total net benefits, or total benefits
minus total costs.
Definition The Kaldor-Hicks principle
states that a policy should be adopted if
the winners could in principle
compensate the losers, which requires
that the total benefits outweigh the total
costs.
DECISION CRITERIA FOR
BENEFIT COST ANALYSIS
In this chapter, the benefit-cost analysis will be considered briefly
using marginal analysis in order to display the connection between
this analysis and the microeconomics on which it is based. More
time will be spent reviewing benefit-cost decision rules that can be
applied when imperfect information or other factors prevents the
policy analyst from using marginal analysis. In practice, costbenefit studies are seldom based on explicit marginal costs and
benefits, so these rules will be the most useful part of the chapter
for most readers
Marginal analysis of policy
decisions
is an examination of the associated costs and
potential benefits of specific business activities or
financial decisions. The goal is to determine if
the costs associated with the change in activity
will result in a benefit that is sufficient enough to
offset them.
For example, if a company has room in its budget for another
employee and is considering hiring another person to work in a
factory, a marginal analysis indicates that hiring that person
provides a net marginal benefit. This means the ability to produce
more products outweighs the increase in labor costs.
Non-marginal decision criteria
When information is not complete enough for marginal analysis, it
is possible to compare the total or average benefits and costs of a
policy using at least three different formulas.
Net benefits = total benefits – total costs
Benefit-cost ratio = total benefits/total costs
Rate of return = 100% × (total benefits – total
costs)/total costs