CBA requires that all benefits and costs can be given values on a common scale or denominator (e.g. monetary values). This allows for direct comparison of the costs and benefits associated with a project. The majority of costs and benefits encountered in a project will conform to quantification.
For example, consider a construction project. The cost of machine rental, the rental of site privacy boarding, and the wages paid to workers are all easily identifiable and as such quantifiable for use in project appraisal. Similarly a number of benefits of a construction project can be identified which are easy to quantify, such as job creation, and the income for the construction company completing the project.
However, while projects will often contain a number of costs and benefits which can be relatively easily identified and quantified by the researcher, equally there may be a number of costs and benefits which present a challenge.
Problems of quantification
For a given project it is likely to be difficult to quantify all aspects of that project. A number of key challenges often exist for the researcher in attempting to obtain and apply values to certain costs and benefits associated with a project. These are as follows:
(1) No direct market value may exist for a cost or benefit. For example, consider a road improvement project which is estimated to result in a reduction in fatalities on a section of road which averages 10 deaths per year. The problem which exists for the researcher performing a CBA is how to apply a monetary value to the lives saved from the road improvement. What value would you apply to a life?
(2) No appropriate market value may exist. For example, we could consider the value of an acre of park land. It has a market value, equal to the current market valuation for an acre of land in a particular geographical location. However, this market value does not reflect that this may be the only park within a 10 mile radius, and that the park may be a habitat to rare wildlife. The market value therefore represents an inappropriate valuation of the parkland.
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This resource was created by Dr Dan Wheatley. The project was funded by the Economics Network and the Centre for Education in the Built Environment (CEBE) as part of the Teaching and Learning Development Projects 2010/11.