This document discusses cost-benefit analysis as a tool for guiding public expenditure decisions. It explains that cost-benefit analysis aims to identify the option that provides the maximum net benefit by comparing total costs and total benefits. It outlines what costs and benefits should include, such as use values, non-use values, and option values. The document also discusses how to value environmental impacts and benefits. It notes some limitations of cost-benefit analysis, such as the challenges of assigning monetary values to all impacts. Finally, it lists the key steps in conducting a cost-benefit analysis.

1. PONNADA PUSPALATHA
Assistant Professor
ADITYA INSTITUTE OF TECHNOLOGY AND MANAGEMENT(AUTONOMOUS)
Tekkali, Srikakulam.

2. Introduction
 Cost-benefit analysis is a set of practical procedures
for guiding public expenditure decisions.

3.  We want our environment to be clean and safe.
 But ‘how much’ clean and safe ?
 How to measure environmental benefits and costs ?

4. Total Cost
Total Benefit
Maximum Net
Benefit
Q1 Q
*
Q0 Q2
Most Efficient
Resource
Distribution
• Our aim is to
attain the
‘most efficient’
resource
distribution.
•We will select
the option
with the
‘maximum’ net
benefit

5.  Project cost =
cost of resources + cost imposed on third parties
 Include only incremental costs
 Do not include – interest payments, depreciation
Project costs

6. Project benefits
 Use and Non-use values
 Use values = all use benefits to man
 Non-use values =
Direct or Indirect use benefits + option values +
existence values

7. Environmental values
Environmental
Values
Use Values
Direct Use Values
(Timber, Food,
Recreation)
Indirect Use
Values
( Nutrient
Recycling)
Non-use Values
Optional Use
Values
(Gene pool)
Bequest Values
(Conservation
Rainforests)
Existence values
(Conservation of
Tiger)

8. Secondary benefits
 Result from primary benefits of the project
 e.g. project > higher wages to employees > higher
expenditure > improve quality of life
 Not included in CBA
 Viewed as transfer between communities rather than
net addition to community income

9. Option values
 Risk is attached to all decisions
 Uncertainty about demand and supply in future
 Pay more to insure demand or supply
 Option value =
value that an individual is willing to pay in excess to
expected use value to preserve an asset

10. Uncertainty continued ….
Project A
Project B
ENPV
$ 1.5 M
P = 1
P = 0.5
P = 0.5
$ 5 M
$ - 1 M
$ 2 M
$ 2.5 M
$ 1.5 M
$ - 0.5 M
//

11. Steps in CBA
• Role:1
• Environmental components (i) for presenting various option
(ii) Selecting among them
• Role: 2
(i) Environmental mitigation
measures converted into costs
(ii) Management plans
are
useful
Living
organisms
Air Water Soil
i.e, environmental impacts (of a project) are accounted

12.  Role 3: Economic assesment of the environmental
impacts of a project.
 Drawbacks:
 1. Impacts are to be: Transformed and stated in clear
monetary terms
 2. Not useful for small scale development projects.
 3. Not possible to find economic value on
environmental losses or gains that resulted from a
development project.
Not always possible
Intangibles like health – Related
impacts of industrial
developments

13.  Site evaluation together with Major design options:
 Within (i) economic limitations
 Ii) technical limitations
 That give LEAST ECONOMIC COST to the community

14. Thank You !

15. AGSIP 13 – Resource Economics
Question X: Options A, B and C.
Please choose the option you prefer
most by ticking ONE box.
Fifteen-year effects
How much
I pay each
year
Healthy
vegetation left
in floodplains
Kilometres of
waterways in
good health
Protection of
Aboriginal
Cultural sites
Unallocated
water
I would
choose
Option A
$0 20% 1500 25% 0%
Option B
$20 30% 1800 35% 5%
Option C
$50 40% 2100 45% 10%
Choice Modelling Valuation Technique – example choice set