Chapter 7: Cost–Benefit Analysis 101
There are lots of frills with CBA (such as discounting future benefits and costs to convert them to current values). But fortunately the essentials are few and can easily be summarized. In this chapter we cover some of the basic principles as included in a first-level course (101) and in the next chapter deal with some of the extensions as included in a second-level course (201). We leave to Parts III and IV the addition of some of the refinements of CBA. When considering a change in the level of an activity, one should compare the marginal (additional) benefits with the marginal (additional) costs. If marginal benefits (MB) are greater than marginal costs (MC), one should do more of the activity, for one is gaining more than one is losing, leading to positive net benefits. If marginal benefits are lower than marginal costs one should do less of the activity as one is losing more than one is gaining. Net benefits are negative in this case. And if it happens that marginal benefits just equal marginal costs, one should do neither more nor less. One should stay where one was as no other level of activity would bring higher net benefits. Obviously the principles are very general and can apply to any activity. The principles apply to the private sector as well as to governments, though how one would measure the marginal benefits and costs would differ according to who is undertaking the CBA of the activity. Let us see...
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