1. Cost benefit analysis

2. Social costs Social costs are the costs of economic activity to society as a whole Social costs = private costs + external costs Private costs refer to the financial costs of production or consumption (paid by producer or Consumer) External costs refer to the costs to third parties of that action

3. Social benefits Social benefits are the benefits of economic activity to society as a whole Social benefits = private benefits + external benefits Private benefits refer to the benefits to producers and consumers External benefits refer to the benefits received by third parties because of economic activity

4. Cost benefit analysis Cost-benefit analysis (CBA) is an investment decision making tool that considers the social costs and social benefits of an economic decision. CBA is often used by firms and governments to assess the current and future implications of investment projects.

5. Process of CBA 1. Identify the social costs and social benefits of an action 2. Assign a monetary value to these costs and benefits 3. Calculate the costs and benefits for the period of time over which they are likely to be experienced - this will use ‘discounting’ methods to consider the time value of money (NPV) 4. Compare the value of the social costs and benefits to determine the net impact on social welfare. 5. If there are several possible courses of action, the net benefit of each option can be compared

6. Limitations of CBA Difficulty in assigning values to external costs and benefits, particularly where there is no market price available e.g. impacts upon the environment. Shadow pricing must be used. Distributional concerns – the impact on different individuals or groups may vary The process of CBA can be very costly and time- consuming