Insights

Cost-benefit analysis for decision makers

Date

09 March 2020

A non-technical guide to cost-benefit analysis for decision makers

Decision-making is huge part of our everyday lives. Some decisions feel almost automatic, others require immense consideration. We understand how challenging decision-making can be. NineSquared’s mission is to help our clients make great decisions that make people and places better. We do this by using economics and data to give them the knowledge and insights they need to make decisions with confidence.

We have created a short non-technical guide that explains how cost-benefit analysis (CBA) can be used for decision making. The guide explains what CBA is, how it can be used and the key components of undertaking a CBA. It explains how to interpret CBA results, and some pitfalls you should look out for when undertaking a CBA. The guide also briefly outlines other economic analysis techniques such as Cost-Effectiveness Analysis (CEA).

What is it?

At its simplest, Cost-Benefit Analysis (or CBA) is based on the idea that any new project or policy by the public sector should contribute more to society than it takes away. To assess this, CBA attempts to sum up all of the benefits and all of the costs associated with a new project or policy to see if the benefits are greater than the costs over the life of the project or policy.

Simple enough. However, CBA attempts to sum up not only the financial costs and benefits, things like construction costs and savings that a person might gain from a specific policy setting, but also the social costs and benefits to arrive at an evaluation of the overall impact on social welfare. To do so, CBA considers costs like the reduction in air quality that might result from a project that creates pollution, or perhaps the social benefits of reducing deaths and injuries because a road has been made safer. These costs and benefits cannot typically be observed in the market place. These social costs have to be estimated using techniques that have been developed by economists over many years. We outline some of these techniques within the guide.

Who is it for?

Not everyone is an economist. The guide is aimed at anyone who needs to know more about tools and techniques for comparing options and making decisions about projects and policies. It can be read by anyone from a senior executive with limited background in economics or direct experience in undertaking a CBA, to a junior team member who is new to project planning. We hope the guide gives you a good understanding of how CBA works, and helps you to make great decisions.