Cost-Benefit analysis

Definition

Cost-Benefit analysis (CBA) is  a macroeconomic evaluation method that assesses projects through a comparison between their costs and benefits, including social costs and benefits for an entire region or country. Cost-benefit analysis compares the costs and benefits of two or more alternatives of or at least the situation with and without the project; the costs and benefits are considered over for a certain period of investigation. A CBA is based on discounted cash flow methodology.

Methodology

CBA examines activities in a trade-off or balancing mode and has been used for making decisions in the water sector for more than 50 years. CBA quantifies in monetary terms as many of the costs and benefits of a proposal as feasible, including items for which the market does not provide a satisfactory measure of economic value. CBA examines whether the total benefits of a project, evaluated in terms of money, exceed the costs of utilizing resources.  

The essence of CBA lies in:

    • Identifying items of benefit and cost in the flood management project from an economic viewpoint, i.e. taking into account all the benefits accruing to and all the costs incurred by the economy or society as a whole
    • Selecting appropriate prices for evaluating the benefits and costs in monetary terms
    • Adjusting the future prices of costs and benefits to present values to make them

Being a monetary-based analysis, CBA does not take into account any moral issues, such as distributional equity. People living in inferior circumstances (lower income, educational level, social status) are unlikely to be able to express their preferences in monetary terms due to their economic, political and technological constraints.


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Economic aspects
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TUHH

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Cost-Benefit Analysis