Question

“Social Cost-Benefit Analysis (SCBA) is an assessment method used to determine the economic prudence of a project, programme, or policy to all relevant members of society”. Critically examine this statement. [50 marks]

“Social Cost-Benefit Analysis (SCBA) is an assessment method used to determine the economic prudence of a project, programme, or policy to all relevant members of society”. Critically examine this statement.

Answer 1

Social cost benefit analysis (SCBA)

• A social cost benefit analysis is a systematic and cohesive method to survey all the impacts caused by an (urban) development project or other policy measure.
• It comprises not just the financial effects (investment costs, direct benefits like profits, taxes and fees, et cetera), but all the societal effects, like: pollution, environment, safety, travel times, spatial quality, health, indirect (i.e. labour or real estate) market impacts, legal aspects, et cetera.
• The main aim of a social cost benefit analysis is to attach a price to as many effects as possible in order to uniformly weigh the above-mentioned heterogeneous effects. As a result, these prices reflect the value a society attaches to the caused effects, enabling the decision maker to form an opinion about the net social welfare effects of a project.

Compare different project alternatives

• A major advantage of a social cost benefit analysis is that it enables investors to systematically and cohesively compare different project alternatives. Hence, these alternatives will not just be compared intrinsically, but will also be set against the “null alternative hypothesis”.
• This hypothesis describes “the most likely” scenario development in case a project will not be executed. Put differently, investments on a smaller scale will be included in the null alternative hypothesis in order to make a realistic comparison in a situation without “huge” investments.

Calculate direct, indirect and external effects

The social cost benefit analysis calculates the direct (primary), indirect (secondary) and external effects:

• Direct effects are the costs and benefits that can be directly linked to the owners/users of the project properties (e.g., the users and the owner of a building, recreational area, wind energy park, or highway).
• Indirect effects are the costs and benefits that are passed on to the producers and consumers outside the market with which the project is involved (e.g., the owner of a bakery nearby the new building, or a business company located near the newly planned highway, recreational area, indirect tax incomes, etc.).
• External effects are the costs and benefits that cannot be passed on to any existing markets because they relate to issues like the environment (noise, emission of CO2, etc.), safety (traffic, external security) and nature (biodiversity, dehydration, etc.).

The result of a social cost benefit analysis are:

• An integrated way of comparing the different effects. All relevant costs and benefits of the different project implementations (alternatives) are identified and monetized as far as possible. Effects that cannot be monetized are described and quantified as much as possible.
• Attention for the distribution of costs and benefits. The benefits of a project do not always get to the groups bearing the costs. A social cost benefit analysis gives insight in who bears the costs and who derives the benefits.
• Comparison of the project alternatives. A social cost benefit analysis is a good method to show the differences between project alternatives and provides information to make a well informed decision.
• Presentation of the uncertainties and risks. A social cost benefit analysis has several methods to take economic risks and uncertainties into account. The policy decision should be based on calculated risk.