Question

What is Cost-Benefit Analysis? Why is it hard to do?

Answer 1

Cost-benefit analysis is a basic method used by both people and companies to make hard choices. Simply draw a T map with the costs titled on the left column and the advantages listed on the right column. Write down on each side the pluses and minus of a decision using the same measurement unit (usually money). Assemble the columns and decide if the advantages outweigh the decision's costs. Some variables are more abstract and have to be translated into a hard to calculate utility value.

The most difficult thing to calculate is maybe human life. In Western culture one life's worth is limitless. However, there are dangers that may lead to death for other issues like safety measures, speed limits, medications, and other items. The reasonable risk of death must be calculated by the companies manufacturing food items. The lower mortality rate is clearly the better, but there will still be some amount of risk. Industries, for example, put peanuts in their food knowing that certain people would get a harmful allergic reaction. If the company might put notices on the packaging, the consumer may not always be prevented from consuming the product.

Pollution is an externality which economists struggle to measure for a cost-benefit analysis. So much is a clean river or a healthy forest worth? There are few general ways in which emission prices are approximated. Such approaches include the expense of cleaning up the mess, and the cost of addressing pollution-related health issues. At a smaller level, it is impossible to measure an office's cost of polluted air and water, and how much harm it can do to the safety and productivity of workers.