Difference between revisions of "Social cost-benefit analysis"
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| + | An advantage of an social cost-benefit analysis is that it enablesinvestors to systematically and cohesively compare different projectalternatives. In that case, these alternatives will not just be comparedintrinsically, but will also be set against the null alternative hypothesis. |
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| − | '''Social cost-benefit analysis''' is a systematic and cohesive method to survey all the impacts caused by an urban development project<ref name="ftn84"> In the Netherlands, conducting a social cost-benefit analysis is mandatory for major infrastructure projects. </ref>. It comprises not just the financial effects (investment costs, direct benefits like tax and fees, et cetera), but all the social effects, like: pollution, safety, indirect (labour) market, legal aspects, et cetera. The main aim of a social cost-benefit analysis is to attach a price to as many effects as possible in order to uniformly weigh the above-mentioned heterogeneous effects. As a result, these prices reflect the value a society attaches to the caused effects, enabling the decision maker to form a statement about the net social welfare effects of a project.An advantage of an social cost-benefit analysis is that it enables investors to systematically and cohesively compare different project alternatives. In that case, these alternatives will not just be compared intrinsically, but will also be set against the null alternative hypothesis.== The null hypothesis ==The ultimate goal of a social cost-benefit analysis is to compare a project alternative and its effects with the so-called ‘null hypothesis’. This hypothesis describes ‘the most likely’ situation in case a project would not be executed. This might seem obvious, but putting this in practice means comparing the project alternative with a situation that does not imply that nothing is done to improve the existing situation. Put differently, to make a realistic comparison, investments on a smaller scale have to be included since one cannot assume that the existing situation will not change in the nearby future unless ‘huge’ investments are made. == Measured impacts ==The social cost-benefit analysis calculates the direct (primary), indirect (secondary) and external effects: [#_Primary_economic_impacts Direct effects][#_Primary_economic_impacts :] are the costs and benefits that can be directly linked to the owners/users of the project properties (e.g., the users and the owner of a building or highway). [#_Secundary_economic_effects Indirect effects]: ''are the costs and benefits that are passed on to the producers and consumers outside the market with which the project is involved (e.g., the owner of a bakery nearby the new building, or a business company located near the newly planned highway).[#_External_effects_1 External effects]: are the costs and benefits that cannot be passed on to any existing markets because they relate to issues like the environment (noise, emission of CO2, etc.), safety (traffic, external security) and nature (biodiversity, dehydration, etc.).The model engineers try to quantify and monetize as much effects as possible. Effects that can’t be monetized are presented in a such a way that they can be compared. This way, policymakers can include these effects in their final judgement if an urban planning project (or a particular variation) is worth investing in. The method of monetizing effects can also influence the outcome of a social cost-benefit analysis and predictions will always remain uncertain. Therefore, the results of a social cost-benefit analysis are not absolute. Nevertheless it is a good instrument to investigate the strong and weak points of the different alternatives. == Results of a social cost-benefit analysis ==The result of a social cost-benefit analysis are:# ''An integrated way of comparing the different effects. ''All relevant costs and benefits of the different project implementations (alternatives) are identified and monetized as far as possible. Effects that can’t be monetized are described and quantified as much as possible. # ''Attention for the distribution of costs and benefits. ''The benefits of a project do not always get to the groups bearing the costs. A social cost-benefit analysis gives insight in who bears the costs and who derives the benefits. # ''Comparison of the project alternatives.'' A social cost-benefit analysis is a good method to show the differences between project alternatives and provides information to make a well informed decision.# ''Presentation of the uncertainties and risks''. A social cost-benefit analysis has several methods to take economic risks and uncertainties into account. The policy decision should be based on calculated risk. == Risk of Double counting ==An impact of a urban development project can be measured in two or more ways. For example, when an improved highway reduces travel time, the value of real estate property in areas served by the highway will be enhanced. The increase in property values due to the project is possible way to measure the benefits of a project. But if the increased property values are included, it is unnecessary to include the value of the time saved by the improvement in the highway. Unnecessary, because the value of the real estate property went up because of improvement in reach ability, so including both the increase in property values and the time saving reduction, would lead to a double counting. == Moral (ethical) aspects of a social economic analysis ==Moral issues are the foundation of any social-economic decision. At this point we mention three aspects of this foundation:=== The individual versus the well being of the majority ===The aim of a social cost-benefit analysis is to select the project with the highest social cost-benefit ratio that will lead to a maximization of wealth in a society. But what if the planned expansion of a new airport will indeed increase the (economic) well being of a region, but will reduce the quality of life for people living close to the airport significantly? Put differently, is the wellbeing of the mass always more valuable than that of the individual elements it exists of? === The economic value of a human life and the environment ===Another source of controversy is placing a monetary value of human life, for example, when assessing safety measures against terrorism. It is kind of cold-blooded to make a cost-benefit analysis of the economic side of human loss. But, without placing a financial value on life itself, a social cost-benefit analysis would lose its value, especially when the purpose of a project is to improve the safety of local residents. The same kind of moral issues can be raised when the environment is valued as a provider of services to humans, such as safe water supply and pollination. Also here, one can wonder if it is always possible to value the environment, especially because one cannot afford to make mistakes.=== Who deserves safety? ===A third source of moral controversy comes from the question if everyone deserves protection from (terrorist) threats or only the wealthy? This is a question policy makers and urban planners have to deal with every day. |
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| + | '''Social cost-benefit analysis''' is a systematic and cohesive methodto survey all the impacts caused by an urban development project<refname="ftn84"> In the Netherlands, conducting a social cost-benefitanalysis is mandatory for major infrastructure projects. |
||
| + | |||
| + | |||
| + | </ref>. It comprises not just the financial effects (investmentcosts, direct benefits like tax and fees, et cetera), but all the socialeffects, like: pollution, safety, indirect (labour) market, legal aspects, etcetera. The main aim of a social cost-benefit analysis is to attach a price toas many effects as possible in order to uniformly weigh the above-mentionedheterogeneous effects. As a result, these prices reflect the value a societyattaches to the caused effects, enabling the decision maker to form a statementabout the net social welfare effects of a project. |
||
| + | |||
| + | |||
| + | == The null hypothesis == |
||
| + | The ultimate goal of a social cost-benefit analysis is to compare aproject alternative and its effects with the so-called ‘null hypothesis’. Thishypothesis describes ‘the most likely’ situation in case a project wouldnot be executed. This might seem obvious, but putting this in practice meanscomparing the project alternative with a situation that does not imply thatnothing is done to improve the existing situation. Put differently, to make arealistic comparison, investments on a smaller scale have to be included sinceone cannot assume that the existing situation will not change in the nearbyfuture unless ‘huge’ investments are made. |
||
| + | |||
| + | == Measured impacts == |
||
| + | The social cost-benefit analysis calculates the direct (primary),indirect (secondary) and external effects: |
||
| + | |||
| + | [#_Primary_economic_impacts Direct effects][#_Primary_economic_impacts:] are the costs and benefits that can be directly linked to the owners/usersof the project properties (e.g., the users and the owner of a building orhighway). |
||
| + | |||
| + | [#_Secundary_economic_effects Indirect effects]: ''are the costs andbenefits that are passed on to the producers and consumers outside the marketwith which the project is involved (e.g., the owner of a bakery nearby the newbuilding, or a business company located near the newly planned highway). |
||
| + | |||
| + | [#_External_effects_1 External effects]: are the costs and benefits thatcannot be passed on to any existing markets because they relate to issues likethe environment (noise, emission of CO2, etc.), safety (traffic, externalsecurity) and nature (biodiversity, dehydration, etc.). |
||
| + | |||
| + | The model engineers try to quantify and monetize as much effects aspossible. Effects that can’t be monetized are presented in a such a way thatthey can be compared. This way, policymakers can include these effects in theirfinal judgement if an urban planning project (or a particular variation) isworth investing in. The method of monetizing effects can also influence theoutcome of a social cost-benefit analysis and predictions will always remainuncertain. Therefore, the results of a social cost-benefit analysis are notabsolute. Nevertheless it is a good instrument to investigate the strong andweak points of the different alternatives. |
||
| + | |||
| + | == Results of a socialcost-benefit analysis == |
||
| + | The result of a socialcost-benefit analysis are: |
||
| + | |||
| + | # ''An integrated way ofcomparing the different effects. ''All relevant costs and benefits of thedifferent project implementations (alternatives) are identified and monetizedas far as possible. Effects that can’t be monetized are described andquantified as much as possible. |
||
| + | # ''Attention for thedistribution of costs and benefits. ''The benefits of a project do not alwaysget to the groups bearing the costs. A social cost-benefit analysis gives insightin who bears the costs and who derives the benefits. |
||
| + | # ''Comparison of theproject alternatives.'' A social cost-benefit analysis is a good method to showthe differences between project alternatives and provides information to make awell informed decision. |
||
| + | # ''Presentation of theuncertainties and risks''. A social cost-benefit analysis has several methodsto take economic risks and uncertainties into account. The policy decisionshould be based on calculated risk. |
||
| + | |||
| + | == Risk of Double counting== |
||
| + | An impact of a urban development project can be measured in two or moreways. For example, when an improved highway reduces travel time, the value ofreal estate property in areas served by the highway will be enhanced. Theincrease in property values due to the project is possible way to measure thebenefits of a project. But if the increased property values are included, it isunnecessary to include the value of the time saved by the improvement in thehighway. Unnecessary, because the value of the real estate property went upbecause of improvement in reach ability, so including both the increase inproperty values and the time saving reduction, would lead to a double counting. |
||
| + | |||
| + | == Moral (ethical) aspects of a social economic analysis == |
||
| + | Moral issues are the foundation of any social-economic decision. At thispoint we mention three aspects of this foundation: |
||
| + | |||
| + | === The individual versus the well being of the majority === |
||
| + | The aim of a social cost-benefit analysis is to select the project withthe highest social cost-benefit ratio that will lead to a maximization ofwealth in a society. But what if the planned expansion of a new airport willindeed increase the (economic) well being of a region, but will reduce thequality of life for people living close to the airport significantly? Putdifferently, is the wellbeing of the mass always more valuable than that of theindividual elements it exists of? |
||
| + | |||
| + | === The economic value of a human life and the environment === |
||
| + | Another source of controversy is placing a monetary value of human life,for example, when assessing safety measures against terrorism. It is kind ofcold-blooded to make a cost-benefit analysis of the economic side of humanloss. But, without placing a financial value on life itself, a social cost-benefitanalysis would lose its value, especially when the purpose of a project is toimprove the safety of local residents. The same kind of moral issues can beraised when the environment is valued as a provider of services to humans, suchas safe water supply and pollination. Also here, one can wonder if it is alwayspossible to value the environment, especially because one cannot afford to makemistakes. |
||
| + | |||
| + | === Who deserves safety? === |
||
| + | A third source of moral controversy comes from the question if everyone deservesprotection from (terrorist) threats or only the wealthy? This is a questionpolicy makers and urban planners have to deal with every day. |
||
Revision as of 18:42, 1 March 2012
An advantage of an social cost-benefit analysis is that it enablesinvestors to systematically and cohesively compare different projectalternatives. In that case, these alternatives will not just be comparedintrinsically, but will also be set against the null alternative hypothesis.
Social cost-benefit analysis is a systematic and cohesive methodto survey all the impacts caused by an urban development project<refname="ftn84"> In the Netherlands, conducting a social cost-benefitanalysis is mandatory for major infrastructure projects.
</ref>. It comprises not just the financial effects (investmentcosts, direct benefits like tax and fees, et cetera), but all the socialeffects, like: pollution, safety, indirect (labour) market, legal aspects, etcetera. The main aim of a social cost-benefit analysis is to attach a price toas many effects as possible in order to uniformly weigh the above-mentionedheterogeneous effects. As a result, these prices reflect the value a societyattaches to the caused effects, enabling the decision maker to form a statementabout the net social welfare effects of a project.
Contents
The null hypothesis
The ultimate goal of a social cost-benefit analysis is to compare aproject alternative and its effects with the so-called ‘null hypothesis’. Thishypothesis describes ‘the most likely’ situation in case a project wouldnot be executed. This might seem obvious, but putting this in practice meanscomparing the project alternative with a situation that does not imply thatnothing is done to improve the existing situation. Put differently, to make arealistic comparison, investments on a smaller scale have to be included sinceone cannot assume that the existing situation will not change in the nearbyfuture unless ‘huge’ investments are made.
Measured impacts
The social cost-benefit analysis calculates the direct (primary),indirect (secondary) and external effects:
[#_Primary_economic_impacts Direct effects][#_Primary_economic_impacts:] are the costs and benefits that can be directly linked to the owners/usersof the project properties (e.g., the users and the owner of a building orhighway).
[#_Secundary_economic_effects Indirect effects]: are the costs andbenefits that are passed on to the producers and consumers outside the marketwith which the project is involved (e.g., the owner of a bakery nearby the newbuilding, or a business company located near the newly planned highway).
[#_External_effects_1 External effects]: are the costs and benefits thatcannot be passed on to any existing markets because they relate to issues likethe environment (noise, emission of CO2, etc.), safety (traffic, externalsecurity) and nature (biodiversity, dehydration, etc.).
The model engineers try to quantify and monetize as much effects aspossible. Effects that can’t be monetized are presented in a such a way thatthey can be compared. This way, policymakers can include these effects in theirfinal judgement if an urban planning project (or a particular variation) isworth investing in. The method of monetizing effects can also influence theoutcome of a social cost-benefit analysis and predictions will always remainuncertain. Therefore, the results of a social cost-benefit analysis are notabsolute. Nevertheless it is a good instrument to investigate the strong andweak points of the different alternatives.
Results of a socialcost-benefit analysis
The result of a socialcost-benefit analysis are:
- An integrated way ofcomparing the different effects. All relevant costs and benefits of thedifferent project implementations (alternatives) are identified and monetizedas far as possible. Effects that can’t be monetized are described andquantified as much as possible.
- Attention for thedistribution of costs and benefits. The benefits of a project do not alwaysget to the groups bearing the costs. A social cost-benefit analysis gives insightin who bears the costs and who derives the benefits.
- Comparison of theproject alternatives. A social cost-benefit analysis is a good method to showthe differences between project alternatives and provides information to make awell informed decision.
- Presentation of theuncertainties and risks. A social cost-benefit analysis has several methodsto take economic risks and uncertainties into account. The policy decisionshould be based on calculated risk.
Risk of Double counting
An impact of a urban development project can be measured in two or moreways. For example, when an improved highway reduces travel time, the value ofreal estate property in areas served by the highway will be enhanced. Theincrease in property values due to the project is possible way to measure thebenefits of a project. But if the increased property values are included, it isunnecessary to include the value of the time saved by the improvement in thehighway. Unnecessary, because the value of the real estate property went upbecause of improvement in reach ability, so including both the increase inproperty values and the time saving reduction, would lead to a double counting.
Moral (ethical) aspects of a social economic analysis
Moral issues are the foundation of any social-economic decision. At thispoint we mention three aspects of this foundation:
The individual versus the well being of the majority
The aim of a social cost-benefit analysis is to select the project withthe highest social cost-benefit ratio that will lead to a maximization ofwealth in a society. But what if the planned expansion of a new airport willindeed increase the (economic) well being of a region, but will reduce thequality of life for people living close to the airport significantly? Putdifferently, is the wellbeing of the mass always more valuable than that of theindividual elements it exists of?
The economic value of a human life and the environment
Another source of controversy is placing a monetary value of human life,for example, when assessing safety measures against terrorism. It is kind ofcold-blooded to make a cost-benefit analysis of the economic side of humanloss. But, without placing a financial value on life itself, a social cost-benefitanalysis would lose its value, especially when the purpose of a project is toimprove the safety of local residents. The same kind of moral issues can beraised when the environment is valued as a provider of services to humans, suchas safe water supply and pollination. Also here, one can wonder if it is alwayspossible to value the environment, especially because one cannot afford to makemistakes.
Who deserves safety?
A third source of moral controversy comes from the question if everyone deservesprotection from (terrorist) threats or only the wealthy? This is a questionpolicy makers and urban planners have to deal with every day.
