Comparing cost-benefit analysis and multi-criteria analysis

Abstract

Abstract We provide an in-depth comparison of cost-benefit analysis (CBA) and multi-criteria analysis (MCA) by, among other things, reviewing the literature which elaborates on the differences between both methods. The root of all the differences between the two methods is that welfare economics provides strict procedures for conducting a CBA, whereas MCA methods are not based on this theory which gives MCA analysts a relatively large degree of freedom when conducting the appraisal. We identified five inherent differences between the two methods: (1) a CBA investigates how citizens and firms that are affected by a transport project experience the impacts of the project, whereas a MCA is based on the judgments of experts and/or stakeholders who might not experience any impacts of a transport project themselves; (2) a CBA only includes the impacts that affect the welfare of individuals, whereas MCA analysts have the full freedom to include every possible impact in their studies; (3) CBA measures a project's societal value by making impacts of transport projects comparable in monetary terms using the notion of individuals' willingness to pay. The aggregation of impacts/criteria in a MCA can be partly based on translating impacts/criteria into monetary terms, but the aggregation is also based on at least one other weighting method (e.g., scoring or ranking); (4) CBA inherently accounts for the fact that social impacts of transport projects occur over a number of periods by discounting future impacts of the project, whereas the time dimension is rarely included in a MCA; (5) the final indicators of a CBA communicate very clearly and are therefore easy to use in the media and the public/political debate. The interpretation of the outcome of a MCA is relatively unclear. This chapter closes with conducting a CBA and a MCA for a fictious transport project to illustrate the differences between the two methods.