This essay is meant to give a brief overview of Cost-benefits-Analysis as part of public economics and should discuss especially the distribution of gains and losses caused by a public project. Economic methods of nearly exact estimation of particularly intangible, but also tangible elements and the examinations of market failures, which are intentionally left out.
2. Background and context of Cost-Benefit-Analysis
Public Economics could be loosely described as economic actions of the government. The government regulates the economy in terms of setting laws and amending property rights, it sets prices through taxes and subsidies and it produces goods. The production of goods and especially the proceeding of projects need to be analysed and evaluated to ensure efficiency in resource allocation in order to maximise gains in social welfare. The government sometimes has to choose between different alternative projects or if a certain project should be carried out. One systematic procedure for evaluation is the Cost-Benefit-Analysis (CBA). CBA are also useful to justify actions ex post and to guarantee a transparent decision process. It is mainly used for public policy issues including future generations in contrast to financial analysis in the private sector, which exclude third-party effects if they are not relevant in terms of making payments or receiving compensation. Public programs for health, education or the environment are typical fields for the use of CBA.
3. Principles and fundamentals of CBA
The CBA refers to changes in the allocation of resources brought about by a project. It tries to investigate whether a specific project is advantageous for social welfare. The answer is given by comparing total direct and indirect positive effects (benefits) and negative effect (costs) over a certain time horizon and not cash flows or revenue flows. If the government has to decide whether to carry out a project or not, the project should proceed if the result of the benefits deducted by the costs is positive. In other words, the opportunity costs have to be lower than the net benefit of the project. Opportunity costs can be defined as missed values of alternative uses of a resource. Alternative uses can be, as said before, understood as not carrying out a project or alternative projects.