Costs and Benefits

Costs and Benefits

When conducting a standard CBA, or most other forms of CBA, the most important element of data gathering conducted by the researcher is in collecting data on costs and benefits associated with a project or a set of project alternatives.

Costs
Types of costs

Various costs are incurred in preparation of, during, and after a project. The exact nature of the costs incurred in a project are dependent on the specific project being appraised. However, there are a number of common costs.

Common costs include:

Design/planning
Purchase of land/site
Demolition
Site preparation
Construction
Externalities (e.g. increased noise pollution during construction)
Reductions in aesthetic of an area or locale
Training
Wages
Maintenance
Administration/transaction costs

Benefits
Types of benefits

Various benefits are realised from a project. Obviously these benefits, as with costs, are dependent on the type of project being appraised e.g. a road development project would likely have benefits including time-savings and reduced pollution as a result of reductions in congestion.

Common benefits resulting from projects include:

Live savings and/or reduced injury
Reductions in pollution
Job creation
Positive (possible multiplier) effect on local/wider economy.
Time-savings
Aesthetic improvements
Revenues (from a toll on a road for example)

What to Include in the Analysis

The decision over which benefits and costs to include is highly important. Not including a particular benefit or cost could have the effect of changing the overall result of the CBA. With this in mind all benefits and costs should be included in a CBA and quantified using a common scale (usually monetary). It should be noted, though, that in practice there are a range of barriers to the inclusion and quantification of all costs and benefits.

Primary and Secondary markets

One important distinction that may need to be made when considering the costs and benefits involved in a project are primary and secondary markets.

Primary markets refer to markets that are directly affected by the project, while secondary markets are those that are indirectly affected.

For example a change in transport policy which promotes increased public transport use, will have effects in both primary and secondary markets.

The primary markets in this case will be changes in car, bus and train usage, as well as reductions in pollution as a result of decreased congestion.

Secondary effects, in this example, would be the indirect impacts the change in policy has on petrol sales and parking spaces.

Obstacles/barriers

In reality a number of obstacles exist which may render the inclusion of all costs and benefits impractical or infeasible.

An obvious barrier is resources. If a sole researcher is undertaking a CBA, especially if it is for a large-scale project, it may be impossible given a particular time constraint for the researcher to accurately consider all potential costs and benefits involved in a project.

Another potential obstacle for the researcher is problems in actually gathering data on certain costs or benefits. A researcher may identify a particular benefit of a project, for example the improved aesthetic of a village following the construction of a village monument. But how can the researcher gather data to provide a monetary value for this benefit?

Equally, another obstacle for the researcher is in applying specific values to benefits or costs. The researcher may have data which shows that the extension of a road will reduce loss of life on the road by 3.1 lives per year. However what value should the researcher apply to these saved lives?

The last two points are linked and relate to specific issues of quantification.