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Unit-3 Social Cost Benefit Analysis

Social cost-benefit analysis (SCBA) evaluates investment projects from the perspective of overall societal welfare. It identifies projects that maximize benefits for a country. SCBA allows objective assessment of projects' costs and benefits relative to community needs. It also exposes the rationale for project decisions and allows public feedback. SCBA helps prioritize limited resources to realize maximum benefits, though it can be difficult to quantify all social costs and benefits. The UNIDO approach measures costs and benefits in domestic currency and consumption terms, and considers efficiency, savings, and redistribution impacts at different stages. It involves 5 stages including calculating financial profitability, obtaining net benefits using economic prices, and adjusting for impacts on savings, income distribution

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70 views13 pages

Unit-3 Social Cost Benefit Analysis

Social cost-benefit analysis (SCBA) evaluates investment projects from the perspective of overall societal welfare. It identifies projects that maximize benefits for a country. SCBA allows objective assessment of projects' costs and benefits relative to community needs. It also exposes the rationale for project decisions and allows public feedback. SCBA helps prioritize limited resources to realize maximum benefits, though it can be difficult to quantify all social costs and benefits. The UNIDO approach measures costs and benefits in domestic currency and consumption terms, and considers efficiency, savings, and redistribution impacts at different stages. It involves 5 stages including calculating financial profitability, obtaining net benefits using economic prices, and adjusting for impacts on savings, income distribution

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SOCIAL COSTBENEFIT ANALYSIS

(SCBA)
By:
Narayan
Gaonkar
Meaning:
Social cost benefit analysis (SCBA)called Economic
analysis, is a methodology developed for evaluating
investment projects from the point of view of the
society as a whole.
Advantages
• The ability to identify the projects that
maximize the welfare of the country.

• The ability to objectively assess and quantify the


purpose projects in relation to community needs.

• Exposure of the basis for decision-making for


projects and opportunity for public criticism.

• Ability to rank and prioritize limited resources so


that the maximum benefit is realized.
Disadvantages
• Difficulty in measuring social costs and benefits
and
converting them in to monitory term.

• Over statement of the value of social benefits

• Complexity

• Conflict between social welfare and financial


justification.
Externalities:
A project may have a beneficial external effects. For example, it
may create certain infrastructural Facilities like roads which
benefit the Neighbouring areas. Such benefits are considered in
SCBA , though they are ignored in assessing the Monetary
benefits to the project sponsors because they do no receive any
monetary compensation from those who enjoy the external
benefit created by the Project . Likewise, a project may have
harmful effect like environmental pollution.
2. UNIDO
•Approach: approach was first articulated in
UNIDO
the Guidelines for Project Evaluation
which provides a comprehensive
framework for SCBA in developing
countries .UNIDO approach is based
largely on the latter publication though
at places we will draw on the former
publication too.
o Measures cost and benefits in terms of
domestic rupees
o Measures cost and benefits in terms of consumption.
o Focuses on efficiency, savings and
redistribution
aspects in different stages.
UNIDO method of project appraisal involves
five stages:
1. Calculation of the financial profitability of the project
measured at market prices.
2. Obtaining the net benefit of the project measured in terms
if economic (efficiency) prices.
3. Adjustment for the impact of the project on savings and
investment.
4. Adjustment for the impact of the project on income and
distribution.
5. Adjustment for the impact of the project on merit goods
and demerit goods whose social values differ from
their economic values.
Net benefit in terms of economic prizes

Choice of Numeraire

One of the important aspects of shadow pricing is the


determination of the numeraire , the unit of account in
which the value of inputs or outputs is expressed. To
define the nummeraire ,the following
questions have to be answered:
1. What unit of currency , domestic or foreign, should be
used to express benefits or costs?
2. Should costs and benefits be measured in
current
values or constant values ?
3. Should the income of the project is measured in terms
of consumption or investment?
Treatment of Taxes
When shadow prices are being calculated, taxes usually
pose difficulties. The general guidelines in the
UNIDO approach with respect to taxes are as follows:
1. When a projects results in diversion of non-traded
consumer goods taxes should be included.
2. When a project augments domestic production by
Other producers, taxes should be excluded.
3. For fully traded goods , taxes should be ignored.
Adjustment for merit and demerit goods

 Merits good is one for which the social value


exceeds the economic value.
 Demerits good is one social value of goods is
less than the economic value.

Income distribution impact

Redistribution of income in favour of


economically weaker sections.
 L-M Shadow Price for Non- Tradable Goods:
Non tradables include goods like land, building and services like power,
internal transport etc. Shadow price for non-tradables is arrived at in terms
of marginal social cost and marginal social benefit.

 L-M Shadow Wage Rate:


It is an important but difficult to determine element in social cost benefit
analysis. It is a function of several factors:

 The marginal productivity of labour


 The cost associated with urbanisation
 The cost of having an additional amount committed to consumption

 Accounting/ Average rate of return method


The accounting rate is the rate used for discounting social profits
Differences between UNIDO
approach and L-M approach
1. UNIDO approach is limited to domestic boundaries
(measures cost and benefits in terms of domestic rupees)
where as, L-M approach considers international aspects
also (measures cost and benefit in terms of
international/border prices).

2. UNIDO approach measures cost and benefits in terms of


consumption where as, the L-M approach measures cost
and benefits in terms of uncommitted social income.

3. The UNIDO approach focuses on efficiency, savings and


redistribution aspects in different stages. L-M approach
tends to view these aspects together.

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