Cost Benefit Analysis
Cost benefit analysis or CBA is a process firms do in order to analyze which decision they should make by estimating and totaling the total equivalent money value of the benefits and the costs of the project for the community. Cost benefit analysis is used to obtain options that would provide maximum benefit along with savings.
History:
The idea of cost-benefit analysis was first originated by a French engineer, Jules Dupuit, who also wrote an article in 1848. After this, Alfred Marshall, a British economist, formulated some concepts that later became the foundation of CBA. But the cost benefit analysis wasn’t applied until 1936, as an outcome of the Federal Navigation Act 1936. This act required the U.S. corps of engineers to do projects
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Select the option or outcome the maximizes the cost-benefit expected value.
The result of the analysis is also dependent on how far we look in the future.
Problems of cost benefit analysis.
Some problems of cost benefit analysis are:
• Shadow pricing and hypothetical markets.
• It ignores the fact that costs and benefits are distributed.
• There is a a magnifying effect. This is the constant increase in the wealth of a particular person.
The first two problems of cost benefit analysis are same as the objections of utilitarianism.
He cost benefit analysis is a very useful process for evaluating and making decisions regarding investing in projects. But the cost benefit analysis considers the costs and the benefits as a single body. It takes in consideration the costs and benefits of all that is involved at once. Simply disregarding the fact that the person enjoying all the benefits can also be different from the person supporting the cost.
Moreover, it does not consider that the benefits enjoyed by a person may be immoral and not ethical as another person may suffer from that action. It just sums up the costs and the benefits using the five step process explained above. If the benefits exceed the costs than the project is a viable one and should be
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