Measurement of benefits and costs: welfare surpluses
This chapter begins with the principles underlying measurement of benefits and costs in economic and social analysis. A money measure is required of the gains and losses in welfare associated with initiatives under investigation. If money incomes are changed directly by a policy initiative, the change in welfare is measured as the change in income. But if product prices are changed, if prices do not properly reflect the true economic value of the effects produced by the initiative, or if market prices are non-existent, the problem of measurement becomes more complicated. The chapter focuses on the measurement of welfare effects when prices change. Costs are measured in terms of either the minimum amount sufferers are willing to accept as compensation for the loss of welfare created by the project, programme or policy, or the maximum amount they are willing to pay to avoid that loss. Obviously, reductions in consumer or producer surpluses qualify as costs.