PRINCIPLES OF COST-BENEFIT ANALYSIS

Robin Boadway

Development Economics Working Papers from East Asian Bureau of Economic Research

Abstract: This paper summarizes the procedure for the economic evaluation of government projects and policy reforms. It begins with the social welfare function underpinnings of cost-benefit analysis including the role of distributive weights and the choice of numeraire. It then turns to the conduct of a social cost-benefit analysis using the net present value criterion. This includes the shadow pricing of market products and inputs affected by the project, indirect welfare effects, the opportunity cost of project finance, the evaluation of non-marketed inputs and outputs, and the opportunity cost of risk. Issues involved in selecting a discount rate are discussed, especially those arising from imperfect capital markets. Finally, since many public projects have long-term consequences, the principles that might be used to take account of effects of projects on future generations are outlined. Techniques for accounting for these effects, such as generational accounting, are summarized and its shortcomings highlighted.

Keywords: evaluation; government projects; policy reforms; imperfect capital markets; generational accounting; shadow pricing (search for similar items in EconPapers)
JEL-codes: D43 I31 L13 (search for similar items in EconPapers)
Date: 2006-01
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Citations: View citations in EconPapers (19)

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Journal Article: Principles of Cost-Benefit Analysis (2006)
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