Intro to Cost-Benefit Analysis


hello and welcome to this video series on cost-benefit analysis in this first video will quickly introduce the difference between looking at decision making from the perspective of a private firm and from the perspective of a larger society and hopefully you’ll start to get a feel for what a cost-benefit analysis is meant to do so let’s say you had $1,000 and he wanted to find out if you could make more money by mining some sort of mineral deposit under a forest how would you make that decision well easily enough you could find out how much it costs to do find out how much money you could earn and see which number is bigger so in the beginning let’s say it takes this much money to get started and after a year this number represents the labor costs the equipment rent just all the costs of running a mining operation for a year but you’ll make this much for selling a year’s worth of minerals and let’s say this is a ten year operation each year you spend two hundred and forty five dollars and you make five hundred dollars spend two forty five make five hundred spend two forty five make five hundred and then after ten years adding everything up it looks like you’ll come away with almost eighteen hundred dollars since you started with a thousand you made an additional seven hundred and ninety five dollars so since you would increase your money over that ten years you should do it right well not necessarily just because you can make money at something doesn’t mean it’s the best idea if you picked up some little rocks went into town and sold those rocks to the kind of people who would buy rocks you would probably come away with more money than you started but maybe you could have spent that time doing something more productive and made even more money so we need to compare this decision this project against others the whole point of this cost-benefit analysis we’ve been doing has been to decide whether it was a good idea or not or what are other options we could go with so typically you would want to at least compare it to doing nothing you know what if you just put that money into a bank at let’s say 5% interests for 10 years if you could make more money by investing it like that there would be no point in trying to put that money into a mining project so let’s say because of interest your money could grow by 5% a year and after 10 years it would be this much money since this is less than the mining project it’s starting to look like the mining project is actually a good idea and you should do it this kind of analysis is called a financial analysis or financial cost-benefit analysis it’s what you would do if you were a single firm or individual trying to maximize your profits you would just be looking at the money coming in and out of the company but look at a slightly different situation let’s say you work for the town and there’s some sort of mineral deposit under a forest nearby that you might be able to makes money on you’ve got a thousand dollars to get started what do you do well same approaches before you’re collecting costs and benefits trying to find out if you come out ahead compared to doing nothing or doing other options you’re trying to put everything into quantifiable dollar values to find the best project or best decision just like in the previous example you will look at whether the mining operation itself is going to make money but you work for the town you’re not just concerned with how this project affects one firm you’re concerned with everyone is everyone going to be better off so what are some of the other things we would need to consider well first of all you have to decide if not a single firm then whose perspective are you considering which people involved are paying the costs and which people are getting the benefits will new jobs in mining reduce unemployment saving the town money on assistance and policing with the town lose access to lumber fuel wood and other forest products will noise affect the town or surrounding wildlife and you would also want to look much more into the future especially for mining does the forest grow back what about tailings ponds the places where they put all the toxic on economic mining products how long will that be there well any of this affect the drinking water supply what if there’s some rare bird within the forest that would definitely go extinct of mining took place are there any other alternatives other than mining for using the same land maybe instead of starting a mining operation they could turn the forest into some sort of maintained Conservation Park that can attract tourists and how big is the analysis going to be or how many people’s the analysis going to include is there another town that’s close enough that you might want to look at that different decisions and different projects might affect the entire world for example if you’re going to start including things like global warming this type of analysis is called an economic cost-benefit analysis or social analysis where a financial analysis deals with how decisions affect a single firm an economic analysis looks at the larger economy you look at all the people the project will affect to see if it’s a sensible decision who’s going to be included in the study which different alternative decisions are going to look at which scenarios are going to consider and how far into the future you’re going to look or all things you’ll define before you start a cost-benefit analysis this series on cost-benefit analysis process will take you through how to make these decisions what to look at what pieces to put together and how to analyze different projects

Leave a Reply

Your email address will not be published. Required fields are marked *