Edited by Clifford S. Russell and Duane D. Baumann
Chapter 3: The Theory and Practice of Benefit–Cost Analysis
3. The theory and practice of benefit-cost analysis John J. Boland, Nicholas Flores and Charles W. Howe INTRODUCTION Economic reasoning began to influence decisions about water resources development and management even before a recognized discipline of economics existed (eighteenth century) but since World War II economics has received increasing weight in the planning for and management of water resources. This has been stimulated by the increasing scarcity of water relative to the multiple demands imposed on it. Economic analysis can inform water resources planning at several levels. Benefit-cost analysis discussed in this chapter is intended to promote the efficient use of resources at the project level by guiding the design of individual projects and their operating rules, by measuring the economic gains generated by alternative projects and then by allowing the comparison of competing projects in terms of their benefits to society. Economic analysis at a more macro or regional level can assess the broader impacts of changes in water availability on parties other than the direct water user, for example, on activities that service irrigated agriculture or the effects of water supply availability on regional economic growth. These higher levels of economic analysis use different tools or models than those used in benefit-cost analysis of individual projects and are not discussed in this volume. To assist in the design and evaluation of water projects and related policies, it is necessary to identify all project effects, beneficial and adverse (benefits and costs), then to quantify those effects in physical terms...
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