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What is Social Cost Benefit Analysis?

Social Cost Benefit Analysis (CBA) is a systematic and quantitative approach used to assess the economic and social impacts of public projects, policies, or programs.

It is a tool employed by governments, organizations, and decision-makers to evaluate whether a proposed project or policy is worth implementing, considering both its costs and benefits. The primary goal of social CBA is to help decision-makers make informed choices that maximize the overall welfare or well-being of society.

This concept of SCBA was evolved by Jules Dupuit, a French engineer, who referred to it in his paper on the measurement of “Utilities of public works”. Flood Control Act of 1936 of the USA provided that a project should be deemed feasible only if sum total of benefits to whoever they may accrue exceeds the estimated costs, highlighting the social nature of investment decisions.

India has taken the lead amongst third-world countries in applying SCBA in appraising projects, especially in the public sector.

Objectives of Social Cost Benefit Analysis

SCBA also referred to as economic analysis is a methodology developed for evaluating investment projects from the point of view of society as a whole. The objectives of social cost-benefit analysis are:

1. For Evaluating Investments
2. Evaluating Individual Projects
3. External Aspects
4. Taxes and Subsidies
5. Consumption and Savings

For Evaluating Investments

In developing countries, governments are playing a significant role in economic development. SCBA is used for evaluating public investments.

SCBA can also be used for evaluating private investments, especially in those countries where these are to be approved by governmental agencies, keeping in mind the impact of these investments on national interests.

Evaluating Individual Projects

SCBA assists in appraising individual projects within the planning framework which spells out national economic objectives, and allocation of resources to different sectors. SCBA is concerned with tactical decision-making within the framework of broad strategic choices defined by planning at the macro level.

External Aspects

A project may be a boon or bane for the neighbouring areas i.e. it may result in benefiting the neighbouring areas by way of be development of ancillary industry and development of the area or it can have an adverse effect on the ecology and environment. In SCBA all costs and benefits irrespective of whom they accrue are considered.

Taxes and Subsidies

In financial analysis, taxes are considered as monetary costs, and subsidies are treated as monetary gains. In SCBA taxes and subsidies are generally considered as transfer payments and hence regarded as irrelevant.

Consumption and Savings

In financial analysis, a private sector firm will not give differential value to consumption and savings. On the other hand, the concern of society for savings and investment is duly reflected in SCBA wherein a higher valuation is placed on savings and a lower valuation is put on consumption.

UNIDO (United Nations Industrial Development Organisation) has come out with a comprehensive framework for SCBA and it involves five stages:

1. Calculation of financial profitability of the project measured at market prices.
   
2. Obtaining the net benefit of the project is measured in terms of economic prices.
   
3. Adjustment for the impact of the project on savings and investments.
   
4. Adjustment for the impact of the project on income distribution.
   
5. Adjustment for the impact of the project on merit goods and demerit goods whose social values differ from their economic values.

India has been one of the pioneers in the use of SCBA for public sector projects. ICICI was the first financial institution to introduce economic appraisal of projects and was followed by IFCI & IDBI. The Project Appraisal Division of the Planning Commission also follows economic analysis.

FAQs About the Social Cost Benefit Analysis