Cost benefit analysis
The Benefit Cost Analysis (BCA) framework is the best known and well proven framework to conduct rigorous analysis of policy or investment options. A financial BCA considers only private costs and benefits to the investment proponent, while an economic BCA take a “whole of society’s” perspective, that may include intangible costs and benefits, thus calculating a “total economic value”.
While the BCA concept is simple, practice requires attention to detail and the following elements need to be rigorously defined:
- Description of a base case or counterfactual
- Identification of benefits and costs
- Valuation and attribution of benefits and costs.
Additional economic techniques can be called upon to help with the valuation of benefits and costs, including non-market valuation and benefit transfer:
- Non-market valuation: some costs and benefits do not refer to any tradeable good or service but may still be highly valued by individuals, such as the enjoyment of a walk in a forest; they are referred to as “non-market values”. Various techniques exist to put a dollar value on such non-market values (including “stated preference” and “revealed preference” techniques).
- Benefit transfer uses non-market values estimated through the techniques described above in a context (or source site) deemed similar to the context of the target site. This reduces the cost of collecting primary data.
Our team is well versed in the use of these techniques, through experience working with government departments and consultancies where these techniques were used. We can also combine BCA frameworks with decision-making under uncertainty techniques.