Question

2. Regarding efficiency, how is social cost-benefit analysis similar to a product market where consumer maximize welfare by allocating resources and firms maximize profit? Why is social cost-benefit analysis necessary in some contexts?

Answer 1

Answer 2:

In all the three cases involving social cost-benefit analysis, product market where consumers and producers are deciding to allocate resources and firms are deciding to maximize profits, the allocation or the optimum amount of allocation takes place at the point where net marginal revenue is equal to zero, or in other words the optimum output is produced at the point where marginal revenue is equal to marginal cost. In social cost-benefit analysis also, the project is undertaken if the net revenue form the project is positive.

The social cost benefit analysis becomes necessary in some contexts mainly in case of public sector projects where an analysis needs to be done before hand before any huge investment is made in the projects and the work on the project is initiated only if total benefits from the project exceed the total cost. Since it is a public good and involves huge amount of investment, thus, social cost analysis becomes vital in this case.