a. Cost-benefit analysis

(i) It is the attempt to compare the total social costs and benefits of an activity usually expressed in money terms.

(ii) The costs and benefits concerned include not only direct pecuniary costs and benefits, but also externalities, meaning external effects not traded in markets.

(iii) The external effects include external costs such as pollution, noise and disturbance to wildlife and external benefits such as reductions in travelling time or traffic accidents.

(iv) Cost-benefit analysis often resorts to the use of shadow prices to evaluate benefits and costs that are qualitative and without market values.

(v) If total social benefits of an activity exceed total social costs, a public project is justifiable, otherwise the project is socially unprofitable.

(vi) Cost-benefit analysis can be used in the allocation of resources among the three-tiers of government and can help to predict whether the benefits of a policy outweigh its costs (and by how much), relative to other alternatives.

b. Methods of evaluation of projects

The two methods are as follows:

(i) Benefits/Costs comparison

This method compares estimated benefits and costs of project to be taken. The decision criterion is that if benefits are greater than the costs of a project, it should be accepted for implementation; otherwise, it should be rejected.

(ii) Benefit/Cost ratio

This method assesses estimated benefits as a ratio of estimated cost. The decision rule is that if the ratio is greater than one (1), the project should be accepted, otherwise, it should be rejected.

c. Justification for CBA

The justification for CBA as a public project appraisal is informed by the following considerations:

(i) The monopolistic power of government over vital or strategic public projects. These are public goods, which are open to use by all members of society, and are really expensive for individuals to provide. The CBA provides the framework for determining the viability of such investments;

(ii) The fact that public projects are such that they have non-marketed costs and benefits which need to be measured and evaluated for relevant public investment decisions;

(iii) The CBA is an appraisal technique designed to capture in a more comprehensive manner externalities (both external costs and benefits) usually identified with public projects; and

(iv) In a situation where service-oriented goal public projects is involved (e.g defence, education and health programmes), CBA is a viable option for appraising such project.