ANALYSIS COST – BENEFIT

(CBA)PONNADA PUSPALATHA

Assistant Professor

ADITYA INSTITUTE OF TECHNOLOGY AND MANAGEMENT(AUTONOMOUS)Tekkali, Srikakulam.

IntroductionCost-benefit analysis is a set of practical

procedures for guiding public expenditure decisions.

We want our environment to be clean and safe.

But ‘how much’ clean and safe ?

How to measure environmental benefits and costs ?

Total Cost

Total Benefit

Maximum Net Benefit

Q1 Q*

Q0 Q2

Most Efficient Resource Distribution

• Our aim is to attain the ‘most efficient’ resource distribution.

•We will select the option with the ‘maximum’ net benefit

Project cost =

cost of resources + cost imposed on third parties

Include only incremental costs

Do not include – interest payments, depreciation

Project costs

Project benefitsUse and Non-use values

Use values = all use benefits to man

Non-use values =

Direct or Indirect use benefits + option values + existence values

Environmental valuesEnvironmental Values

Use Values

Direct Use Values (Timber, Food,

Recreation)

Indirect Use Values

( Nutrient Recycling)

Non-use Values

Optional Use

Values(Gene pool)

Bequest Values

(Conservation

Rainforests)

Existence values(Conservation of Tiger)

Secondary benefitsResult from primary benefits of the project

e.g. project > higher wages to employees > higher expenditure > improve quality of life

Not included in CBA

Viewed as transfer between communities rather than net addition to community income

Option valuesRisk is attached to all decisions

Uncertainty about demand and supply in future

Pay more to insure demand or supply

Option value =

value that an individual is willing to pay in excess to expected use value to preserve an asset

Uncertainty continued ….

Project A

Project B

ENPV

$ 1.5 M

P = 1

P = 0.5

P = 0.5$ 5 M

$ - 1 M

$ 2 M

$ 2.5 M

$ 1.5 M

$ - 0.5 M

//

Steps in CBA

• Role:1• Environmental components (i) for presenting various option (ii) Selecting among them

• Role: 2(i) Environmental mitigation

measures converted into costs (ii) Management plans

are useful

Living organisms

Air Water Soil

i.e, environmental impacts (of a project) are accounted

Role 3: Economic assesment of the environmental impacts of a project.

Drawbacks: 1. Impacts are to be: Transformed and stated

in clear monetary terms

2. Not useful for small scale development projects.

3. Not possible to find economic value on environmental losses or gains that resulted from a development project.

Not always possible

Intangibles like health – Related impacts of industrial developments

Site evaluation together with Major design options:Within (i) economic limitationsIi) technical limitations

That give LEAST ECONOMIC COST to the community

Thank You !

AGSIP 13 – Resource Economics

Question X: Options A, B and C.Please choose the option you prefermost by ticking ONE box.

Fifteen-year effects

How much I pay each

year

Healthy vegetation left in floodplains

Kilometres of waterways in good health

Protection of Aboriginal

Cultural sites

Unallocated water

I would choose

Option A$0 20% 1500 25% 0%

Option B$20 30% 1800 35% 5%

Option C$50 40% 2100 45% 10%

Choice Modelling Valuation Technique – example choice set