Social Cost Benefit Analysis of Projects

 

 

Social cost benefit analysis

Social cost benefit analysis (SCBA) called Economic analysis, is a methodology developed for evaluating investment projects. In other words, it is concerned with Tactical Decision making within the framework of broad strategic choices defined by planning at the macro level.

Objectives of Social Cost Benefit Analysis

The main focus of Social Cost Benefit Analysis is to determine:

Economic benefits of the project in terms of shadow prices;

1. The impact of the project on the level of savings and investments in the society;

2. The impact of the project on the distribution of income in the society;

3. The contribution of the project towards the fulfilment of certain merit wants (selfsufficiency, employment etc).

4. To determine and measure the expected future economic and social benefits that may be derived from an intended project or activity.

5. To determine and measure the flow of future economic and social costs that would be incurred to accomplish the benefits.

6. To ascertain the net benefits as a result of the above assessment.

7. To range the net benefits that may be realised from each of the alternative projects or activities under consideration.

8. To arrive at a decision as to which of the projects or activities will yield the maximum benefits in relation to set economic standards and defined social goals for the national economy.

Significance of Social Cost Benefit Analysis

Market Imperfections: Market prices, the basis for CBA, do not reflect the social values under imperfect market competition.

Externalities: A project may have beneficial or harmful external effects that are considered in Social CBA, not in CBA.

Taxes & Subsidies: From the social point of view, taxes & subsidies are nothing but transfer payments. But in CBA, taxes & subsidies are treated as monetary costs and benefits respectively.

Concern for Savings: In SCBA, the division between benefits & consumption is relevant wherein higher valuation is placed on savings. But in CBA such division is irrelevant.

Concern for Redistribution: In SCBA, the distribution of benefits is very much concerning issue where commercial private firm does not bother about it.

Analysis Techniques:

In relation to the analysis of projects for social profitability via SCB Analysis, the following

techniques are available:

(i) UNIDO Methodology

(ii) Little and Mirrlee’s approach

(iii) Indian Planning Commission methodology

The approaches advocated by the above are same in nature in the sense that they consider distortions in values of foreign exchange, savings and unskilled labour and carry out corrections in a similar way.

UNIDO method—uses the equivalent consumption at critical consumption level. By an application of DCF technique the social IRR (internal rate of return) can be calculated as the yardstick for measurement.

L & M method—uses the uncommitted social income in free foreign exchange at the hands of the Government. This can be in improved by the DCF technique.

Indian Planning Commission’s Method—uses the uncommitted social income at the hands of the Government but revalued at shadow exchange rate.


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