Social cost-benefit analysis

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.

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:

1. 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.
2. 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.
3. 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.
4. 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.