16. Cost-Benefit Analysis

Study

Cost-benefit analysis has been referred to as “nonsense on stilts.” This rather rude description implies that there are so many assumptions involved in the calculations, and so many imponderables about the future effects of projects, that cost-benefit analysis is the functional equivalent of witchcraft in the public sector. Although phrased in exaggerated language, this criticism is to some degree well taken. It is difficult, if not impossible, to know the value of eliminating an externality, just as it is difficult to know just how much life, health, and snail darters are worth economically. Cost-benefit analysis can be used to avoid difficult political decisions and to yield responsibility to experts who can supply the “correct” answer. Such fundamental abdication of political responsibility is indeed an “insidious poison in the body politick.” Only when the results of analysis are integrated with other forms of analysis--including ethical analysis--and combined with sound political judgment can the “correct decision” be made.

Review Questions:

  1. What is cost-benefit analysis and what are its key principles?


  2. Identify and define the key steps involved in using cost-benefit analysis in public-sector planning or project evaluation?


  3. Define net present value, net benefit ratio, and cost-effectiveness analysis and the relationship(s) of one concept to the next.