ANALYSIS OF SOCIAL COST BENEFIT

PRESENTED TO: PRESENTED BY:RAVINDER KAUR RAJAN SHARMA MBA(4TH SEMS.) 4767

SOCIAL COSTS BENEFIT

DEFINATION: It is the study of feasibility of a project

in terms of its total economic cost and total economic benefits

COST BENEFIT INDICATORS:

NPV (net present value) PVB (present value of benefits) PVC (present value of costs) BCR (benefit cost ratio = PVB / PVC) Net benefit (= PVB - PVC) NPV/k (where k is the level of funds

available

WHAT IS SOCIAL COST BENEFIT ANALYSIS

So, to reflect the real value of a project to society, we

must consider the impact of the project on society.

Thus ,when we evaluate a project from the view point ofthe society (or economy) as a whole, it is called Social CostBenefit Analysis (SCBA)/Economic Analysis

IMPACT

NEGATIVESocial cost

POSITIVESocial benefit

SCOPE OF SCBA

SCBA can be applied to both Public & private investments – ▫Public Investment: SCBA is important specially for the developing

countries where govt. plays a significant role in the economic development.

▫Private Investment: Here, SCBA is also important as the private

investments are to be approved by various governmental & quasi-governmental agencies

OBJECTIVE

Economic benefits of the project in terms of shadowprices;

2 The impact of the project on the level of savings and investments in the society;

3. The impact of the project on the distribution of income in the society;

4. The contribution of the project towards the fulfillmentof certain merit wants (self- sufficiency, employmentetc).

SIGNIFICANCE

CBA is unable to reflect social values. Hence SCBA has

been emerged with some interesting significances. These significances also make the SCBA different from the CBA.

Market ImperfectionsExternalitiesTaxes & SubsidiesConcern for SavingsConcern for RedistributionMerit Wants

APPROACHES

There are two principal approaches for Social Cost Benefit Analysis: A. UNIDO Approach, and B. L-M Approach.

APPROACHES TO SCBA: This approach is mainly based on the publication of UNIDO

(United Nation Industrial Development Organization)named Guide to Practical Project Appraisal in 1978.

B. L-M APPROACH: I.M.D Little & J.A.Mirlees have developed this approach for analysis of Social Cost-Benefit in Manual of Industrial Project Analysis in Developing Countriesa and Project Appraisal & Planning for Developing Countries

UNIDO APPROACH

The UNIDO approach of Social Cost Benefit Analysis involves five stages:

•Calculation of financial profitability of the project measured at market prices.

•Obtaining the net benefit of the project at shadow (efficiency) prices.(Objective of SCBA-1)

•Adjustment for the impact of the project on Savings & Investment.(Objective of SCBA-2)

•Adjustment for the impact of the project on Income Distribution. (Objective of SCBA-3)

•Adjustment for the impact of the project on Merit and Demerit Goods whose social values differ from their economic values. (Objective of SCBA-4)

L-M APPROACH

I.M.D.Little and James A.Mirrlees have developed an approach to SCBA which is famously known as L-M approach.

The core of this approach is that the social cost of using a resource in developing countries differs widely from the price paid for it.

Hence, it requires Shadow Prices to denote the real value of a resource to society. (mentioned earlier)

DISSIMILLARITY BETWEEN TWO APPROACHES

UNIDO APPROACH L-M APPROACH

Domestic currency is used as Numeraire Consumption is the

measurement base SCBA objectives are met

through stage by stage

International Price is used as Numeraire Uncommitted Social

Income is the measurement base

At one place all SCBA objectives are fulfilled

SIMILARITIES BETWEEN TWO APPROACHES

•Calculation of Shadow Prices Shadow Prices to reflect social value •Usage of Discounted Cash Flow

Techniques Discounted Cash Flow Techniques

•Taking into account about the effect of a project on savings, investment and income savings, investment and income of a society