7.4.7—Costs/benefits in decision analysis

Cost-benefit analysis estimates the social costs and social benefits of a project, including external effects that do not have a market price. A project is worthwhile in the basic test when estimated net social benefit is positive.

Analysts must define the counterfactual, value time, uncertainty and distribution, and avoid double counting. Shadow prices or stated preferences may be used for non-market effects, but they are estimates rather than exact facts.

A new rail line has construction and operating costs, time savings, fare revenue, congestion relief and noise. Counting only ticket revenue would understate the social benefit; counting both time savings and an already included wage payment could double count.

A positive net present value is not a guarantee: assumptions, discount rate, distribution and omitted risks can change the decision.