What is benefit analysis

Cost-benefit analysis

1. Term: Procedure for the comparative evaluation of objects or alternative courses of action; Cost-benefit analysis, benefit-cost analysis, benefit-cost analysis.

2. Features: Procedure based on welfare economics, mainly used in public budget management, especially in public infrastructure investment projects.

3. Methodology: The future, discounted private and social as well as pecuniary and non-pecuniary costs and benefits (income) of the individual project are determined and compared with the corresponding sizes of alternative investment objects. The alternative with the greatest difference between benefits (income) and costs is chosen.

Justification of this decision criterion in welfare theory, according to which the costs of an investment object are understood as a reduction and its income as an increase in social welfare. Ensuring the rationality of government investment decisions by means of a cost-benefit analysis depends, among other things, on whether the individual cost and benefit determinants can be sufficiently quantified.

4. Discussion: Since the assessment criteria of costs and benefits, the extent of the external effects included in the calculation, the choice of the relevant time period and the associated determination of the discount factor as well as the consideration of side effects cannot be determined “objectively”, the cost-benefit analysis is prone to manipulation.

5. Application areas: in particular environmental economics and resource economics.

See also benefit analysis, cost-effectiveness analysis.