ABSTRACT
This chapter focuses on the rationale and method of cost-benefit analysis. It examines the use of cost-benefit analysis in achieving productivity. The chapter describes the way governments make choices in coping with market failure. It discusses the decision-making process that is used to determine the proper amounts of public goods that should be produced by governments. The chapter also discusses the relatively new concept of "nonmarket failures" and the contributions of economic reasoning to the financial management of government agencies. Government's allocation functions relate to the provision of public goods. Generally, the problem is to decide how much and what type of public goods to provide. Decision makers need some sort of mechanism for deciding these questions, and luckily, they have not just one but three mechanisms: the Pareto criterion, the Kaldor criterion, and the mechanism in place that allows one to invoke these criteria. Cost-benefit structures drive project-by-project or budget-by-budget decisions.
