ABSTRACT
Cost-benefit analysis (CBA) is perhaps the best known technique for public policy analysis and is widely used by policy makers in both advanced and developing economies. In contrast to the models and techniques discussed so far, which have dealt with macro, sectoral and industry level planning decisions, CBA is applied to the most disaggregated level of activity, the individual investment project. As we emphasized at the beginning of the book, the basic problem of planning is that of allocating limited resources among alternative uses in a way that will make the net benefit to the economy as large as possible (benefit, of course, can be defined in a number of ways, depending on the objective function selected). Since resources are limited, choices have to be made, and CBA, or what is often called project appraisal, is a method of evaluating the alternative options in a consistent and comprehensive manner. The basic principle of CBA can be stated simply: if the benefits of a project exceed its costs, where both benefits and costs are measured in the same terms, then the project is worth proceeding with, but if costs exceed benefits the project is rejected.
