Cost benefit analysis and capacity cost rates

Double Counting of Benefits or Costs Must be Avoided Sometimes an impact of a project can be measured in two or more ways.

Importance of cost benefit analysis

It is assumed that more esoteric benefits such as from preserving open space or historic sites have a finite equivalent money value to the public. For example, in determining the impact of a fixed guideway rapid transit system such as the Bay Area Rapid Transit BART in the San Francisco Bay Area the number of rides that would have been taken on an expansion of the bus system should be deducted from the rides provided by BART and likewise the additional costs of such an expanded bus system would be deducted from the costs of BART. But inevitably there will be more traffic than was carried by the old highway. As shown in Figure 1 the area is over the range from the lower limit of consumption before the increase to consumption after the increase. There are many cases in which people voluntarily accept increased risks in return for higher pay, such as in the oil fields or mining, or for time savings in higher speed in automobile travel. Not only do the benefits and costs of a project have to be expressed in terms of equivalent money value, but they have to be expressed in terms of dollars of a particular time. For example, a project may provide for the elderly in an area a free monthly visit to a doctor. In the above example concerning cotton the impact of the project might be zero for the nation but still be a positive amount for Arizona. Will there be a decrease in productivity while people are learning a new system or technology, and how much will this cost?

For example, in determining the impact of a fixed guideway rapid transit system such as the Bay Area Rapid Transit BART in the San Francisco Bay Area the number of rides that would have been taken on an expansion of the bus system should be deducted from the rides provided by BART and likewise the additional costs of such an expanded bus system would be deducted from the costs of BART.

You can use the technique in a wide variety of situations. Therefore some basic principles are needed as a guide. This netting out may be done for some projects and not for others.

cost benefit analysis economics

The relationship between the market price and the quantity consumed is called the demand schedule. Economists recognize that it is impossible to fund every project which promises to save a human life and that some rational basis is needed to select which projects are approved and which are turned down.

The question is how to measure the money value of that time saved. Cost Benefit Analysis Involves a Particular Study Area The impacts of a project are defined for a particular study area, be it a city, region, state, nation or the world.

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AN INTRODUCTION TO COST BENEFIT ANALYSIS