Benefit-Cost Analysis as a Tool in Urban Government Decision Making

Benefit-cost analysis is the name commonly applied to that branch of economic analysis which is used when making decisions about public investments. While it has wider applications, and can be used in the private sector, it is most useful in the public, where it applies the conceptual framework of economic theory, both normative and positive, to problems in which the market competitive forces and private incentives for gain do not provide straightforward guidelines for choice. In the public sector the penalties and rewards usually considered in economic analysis are absent and the prices so central to quantitative analysis in the private economy do not bear the same meaning. Revenues are not necessarily benefits and expenditures not necessarily costs, and their differences do not necessarily measure a goal to be sought. The substitution of benefits for revenues and costs for expenditures necessitates going beyond the traditional confines of the economist, but not outside the economist's model of choice. Success in the venture is most likely in those public activities which most closely approximate private economic activity. This is attested by the initial development of the tool in water resources ¹ and highways, ² where services are produced for actual or notional sale. But we believe that as we gain experience in measuring the imponderables and in understanding the political and administrative processes of government, the techniques may become applicable to a fuller set of public activities.