Cost–Benefit Analysis

Abstract

Cost–benefit analysis (CBA) is a method for assessing the economic efficiency of proposed public policies through the systematic prediction of social costs and social benefits. The concepts of ‘willingness to pay’ and ‘opportunity cost’ guide the valuation of projected policy effects in terms of a money metric. Comprehensively valuing effects and aggregating across all members of society yields the net social benefits of the policy. A policy with positive net social benefits is economically efficient relative to the status quo. When economic efficiency is the only relevant social goal, CBA provides an appropriate decision rule: choose the policy, or set of policies, that maximizes net social benefits.