This document discusses social cost benefit analysis (SCBA) and the UNIDO approach to SCBA. It is divided into several sections that cover: the rationale for SCBA including market imperfections, externalities, and taxes/subsidies; the UNIDO approach and its 5 stages; calculating net benefits using shadow pricing and choosing a numeraire; the concept of tradable goods; sources of shadow prices; and treatment of taxes in the analysis. The overall document provides an overview of how to conduct SCBA according to the UNIDO methodology.

2. MEANING
Social cost benefit analysis (SCBA)called
Economic analysis, is a methodology developed
for evaluating investment projects.
In other words , SCBA is concerned with
Tactical Decision making within the framework
of broad strategic choices defined by planning at
the macro level.

3. SCBA is divided into ten
sections
1.Rationale for SCBA
2.UNIDO approach
3.Net benefit in terms of economic
prizes
4.Saving impacts and its value
5.Income distribution impact
6.Adjustment for merit and demerit
goods

4. Continued..
7.Little-Mirrlees approach
8.Shadow prices
9.SCBA by financial institutions
10.Public sector investment decisions in
India

5. 1.Rationale for SCBA
In SCBA the focus is on the special costs and
Benefits of the project. The principle sources of
discrepancy are:
Market imperfections
Externalities
Taxes and subsidies

6. Market imperfections
The common imperfections found in developing
Countries are :
1.Rationing:- Rationing of a commodity means
control over its price and distribution .The price paid by
a consumer under rationing is often significantly less
Than the price that prevail in the competitive market.
2. Prescription of minimum wage rates :- When
minimum wages would be in a competitive labour
market free from such wage legislations .

7. Continued…
3. Foreign exchange regulation:- The official
rate of foreign exchange in most of the
developing countries, which exercise close
regulation over foreign exchange ,typically less
than the rate that would prevail in the absence
of foreign regulation . That is why foreign
exchange usually commands a premium in
unofficial transactions

8. Externalities
A project may have a beneficial external effects.
For example, it may create certain infrastructural
Facilities like roads which benefit the
Neighbouring areas. Such benefits are
considered in
SCBA , though they are ignored in assessing the
Monetary benefits to the project sponsors
because
they do no receive any monetary compensation
from
those who enjoy the external benefit created by
the
Project . Likewise, a project may have harmful

9. Taxes and Subsidies
From the private point of view ,taxes are
definite monetary costs and subsidies are
definite monetary gains. From the social
point
of view, However ,taxes and subsidies are
generally regarded as transfer payments
and
hence considered irrelevant.

10. 2. UNIDO Approach
UNIDO approach was first articulated in the
Guidelines for Project Evaluation which provides
a comprehensive framework for SCBA in
developing countries .UNIDO approach is based
largely on the latter publication though at places
we will draw on the former publication too.

11. The UNIDO method of project appraisal involves
five stages
1. Calculation of the financial profitability of the
project measured at market places.
2. Obtaining the net benefit of the project
measured in terms of economic prices.
3. Adjustment for the impact of the project on
savings and investments.
4. Adjustment for the impact of the project on
income and distribution.

12. Continued..
5. Adjustment for the impact of the project on
merit goods and demerit goods whose social
values differ from their economic values.

13. 3. Net benefit in terms of economic
prizes
Shadow pricing : Basic issues
Choice of Numeraire
Concept of tradability
Sources of shadow prices
Treatment of Taxes

14. Choice of Numeraire
One of the important aspects of shadow pricing is the
determination of the numeraire , the unit of account
in
which the value of inputs or outputs is expressed
To define the nummeraire ,the following
questions have to be answered:
• What unit of currency , domestic or foreign,
should be used to express benefits or costs?
• Should costs and benefits be measured in current
values or constant values ?

15. Concept of tradability
A key issue in shadow pricing is whether a good
is tradable or not. For a good that is tradable,the
international price is a measure of its
Opportunity cost to the country. Why? For a
tradable good, it is possible to substitute import
for domestic production and vice versa .

16. Sources of shadow prices
The UNIDO approach suggests three sources of
shadow pricing, depending on the impact of the
project on national economy .A project , as it
uses and produces resources, may for any given
input or output
(i) Increase or decrease the total consumption in
the economy.
(ii) decrease or increase production in the
economy .

17. Continued…
(iii) Decrease imports or increase imports
(iv)Increase exports or decrease exports.

18. Treatment of Taxes
When shadow prices are being calculated, taxes
usually
pose difficulties. The general guidelines in the UNIDO
approach with respect to taxes are as follows:
(i) When a projects results in diversion of non-traded
consumer goods ,taxes should be included.
(ii) When a project augments domestic production by
Other producers, taxes should be excluded.
(iii)For fully traded goods , taxes should be ignored.