Social cost-benefit analysis

Social cost-benefit analysis

Social cost-benefit analysis is a systematic and cohesive method to survey all the impacts caused by an urban development project. 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 aproject 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:

Direct effects 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).

Indirect effects are the costs andbenefits 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 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 cannot 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:

1. 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 cannot be monetized are described and quantified as much as possible.
2. 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.
3. 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.
4. 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, sucha s 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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