Past Events

Cost-Benefit Analysis: Its Use in Society

Date: 2 June 2022 (Thursday)
Time: 4:00pm – 5:30pm

About the Talk

This Talk will provide a good introduction and coverage into the scope and purview of Cost-Benefit Analysis. Specifically, it draws on the many cases and examples of its use in society ranging from conventional practices to other more seemingly difficult and challenging areas where often valuations are required for non-market goods, including valuing life, air quality, the social cost of incarceration, crimes, dengue illness, casino gaming and scenic views, and more. Cost-Benefit Analysis provides the necessary framework for efficient resource allocation.

About the Speaker

Euston is Albert Winsemius Chair Professor of Economics, and Director of Economic Growth Centre (EGC) at Singapore’s Nanyang Technological University (NTU), Editor of the Singapore Economic Review, a Social Sciences Citation Indexed journal, and President of the Economic Society of Singapore. As Head of Economics at NTU for 15 years, he transformed the Division of Economics into a globally well-regarded body; Economics in NTU is ranked 41st in the 2022 Quacquarelli Symonds (QS) World University Rankings by Subject, and 52nd in Times Higher Education’s 2021 World University Rankings by Subject.


Key Takeaways from the Eventr

  • Cost-benefit analysis (CBA) is a systematic approach to make an informed decision for the benefit of the society.
  • It puts monetary values to both tangible and intangible effects (costs/benefits), and thus provides a common denominator for assessing the worth of different goods. Intangible prices include noise pollution, cost of a disease, congestion, cost of lives etc.
  • It is applied to not only the infrastructure projects, but also the non-infrastructure projects in health, transport, crime etc. It is used for evaluating services/projects as well as prioritizing projects.
  • CBA is different from private investment analysis in a few ways:

  • CBA aims to maximise society’s benefit as opposed to individual’s/firm’s benefit.
  • In CBA, externalities are included. It takes into account the cost or benefit caused by a producer that is not financially incurred by the producer, including congestion, pollution, noise etc.
  • CBA uses shadow prices when the market price is unsuitable (doesn’t reflect social prices/no ready market prices).
  • In CBA, the approved projects may incur financial loss, but do good for the society as a whole.
  • The important steps taken in CBA are as follows:

    1. Determine the reference target group/accounting stance.

    • Whether a town, state or country is the target group?
    • How to deal with transfer payments?
    • How to avoid double counting of cost/benefit?

    2. Identify the effects of projects.

  • Which costs and benefits are to be included?
  • 3. Classify the effects in terms of costs and benefits.

    4. Value the costs and benefits.

  • Are market prices suitable/available? Do they reflect the opportunity cost?
  • When there are no readily available market prices, a few techniques such as contingent valuation method, hedonic method, travel cost method, benefit transfers method, pairwise comparisons can be used to derive a value.
  • An important concept in CBA is the Value of Statistical Life (VOSL). It’s an economic value to quantify the benefit of avoiding a fatality.
  • 5. Discount future benefits and costs to take into account the long-term values.

    6. Adjust for uncertainty.

    7. Adjust for equity considerations by using quantitative or qualitative weights.

    8. Evaluate alternatives and select projects with the largest social net benefits.

  • Besides use values, CBA also considers non-use values. For example, people are willing to pay to conserve a habitat for the future generation (even if they are not enjoying/using it now).
  • In making an informed decision, CBA may be used along with other inputs such as environment impact assessment, risk analysis, cost-effectiveness scenario analysis, or public opinion, interviews, petition etc.