A Cost–Benefit Approach
Chapter 22: Threshold Analysis Theory
We begin our review of the various methods for estimating benefits and costs by looking at the most general approach. This is appropriate when we have the least idea as to how to proceed with estimation. The clearest case when this method is most useful is when the intervention has just taken place. The time when the effects of the intervention will occur and can be observed is going to be in the future and not now when one may want to make the evaluation. In this situation, the best one can do is place limits on what the unknown value can or cannot be and then try to assess whether those limits are likely to be too high or too low given some other information that we are not unsure about. These limits are called the threshold values. They are also called “switching values” as they determine whether the intervention will switch from being judged successful to being declared unsuccessful. The general method is outlined in this chapter and there are applications in the next three chapters. THE BASICS OF THE THRESHOLD METHOD At the threshold, benefits B equal costs C. This is because if benefits were slightly higher, or costs slightly lower, net benefits would be positive and we would know that the intervention would be worthwhile. Similarly, if benefits were slightly lower, or costs slightly higher, net benefits would be negative and we would know that the intervention would not be worthwhile. So, at the threshold one...
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