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Social Cost Benefits Analysis

Social Cost Benefits Analysis means to analyze the social cost and total social benefits if we accept any

project. In social cost benefit analysis (SCBA), we see whether return or benefits on this investment are

more than its cost from point of view of society in which we are living. In public investment, we analyze

and compare government expenditure with total benefits to society through SCBA. It is also good

technique of financial evaluation of a project because we leave that project whose benefits to society

are less than total cost which will to society because all resources are from society.

Objectives

The main focus of Social Cost Benefit Analysis is to determine:

1. Economic benefits of the project in terms of shadow prices;

2. The impact of the project on the level of savings and investments in the society;

3. The impact of the project on the distribution of income in the society;4. The contribution of the project towards the fulfillment of certain merit wants

Problems which can be solved by Social Cost Benefits Analysis

Rationale for SCBA

a) Market imperfection :

We will not analyze social cost benefit; we cannot find market imperfections. After study of market rates

following factors come in to our knowledge.

i) Rationing factor : It means some of raw material prices are controlled by Govt. So, it may increase our

project cost but its social benefit will go to poor community.

ii) Regulation for providing minimum wage factor: It also affects social cost and benefits of any project.

Because company must have to pay this minimum wages.

iii) Foreign Exchange Regulations factor: Sometime, we have to deal at currency rate which is less than

actual market rate due to regulation on FOREX. So, we should analyze this point also.

b) Externalities :

Externalities are non-cash or benefits which an organization suffer or get if it starts the project. For

example, if govt. makes road near your project plant, you can get this facility without any payment. On

the other side, if any other organization is polluting and spreading diseases, its cost may suffer due to

absence of your employee for going to hospitals.

c) Tax and Subsidies:

Tax is payment on the earning of the project and it will reduce our overall benefits. On the other hand, if

govt. gives us subsidy for operating any project, it will count for our cost benefit analysis.

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To Know the Effect of using one more Unit of Resources

With shadow price, we know the effect of using one more unit of resources on the social cost and

benefits. Shadow pricing is relating to decision of project manager. Before accepting the project, we

have to find the price if we have to use extra unit of resources. Suppose, we have to use one more hour

of labor, what will we pay and what will its effect on social benefits.

Approaches to SCBA

The lm approach to S.C.B.A. has considerable similarity with the UNIDO approach. Inthe first place, both

the approach use shadow (accounting) prices for foreign exchange savings and unskilled labor in

particular. Similarly, both consider factor of equity. And finally both the approaches use DCF (discounted

cash flow) analysis. Nevertheless, the two approaches differ in important respects. For instance, while

the UNIDO approach measure cost and benefits on the basis of the domestic currency (rupees), the L-M

approach use international/ border prices. Moreover, the LM approach uses uncommitted social incomebasis, while UNIDO approach is based on consumption as a measure of cost and benefits. Finally, in

contrast to the stage-by-stage analysis of the UNIDO approach, the LM approach focuses on an

integrated analysis of the consideration such as efficiency, saving and redistribution. The main elements

of the LM approach are briefly outlined here. The outputs and inputs of a project are classified by the lm

approach into three categories, namely, traded goods /services, non traded goods/services and

labor. The computation of their shadow prices is discussed below. There are two principal approaches for Social

Cost Benefit Analysis.

A. UNIDO Approach:

This approach is mainly based on the publication of UNIDO (United Nation Industrial Development

Organization) named Guide to Practical Project Appraisal in 1978.

Step 1. Calculation offinancial profitabilityof the project measured at market prices.

Step 2. Obtaining the net benefit of the project at shadow (efficiency) prices. (1st objective of SCBA)Step 3. Adjustment for the impact of the projecton Savings & Investment. (2

ndobjective of SCBA)

Step 4. Adjustment for the impact of the project on Income Distribution. (3rd objective of SCBA)Step 5. Adjustment for the impact of the project on Merit and Demerit Goods whose social values differ

from their economic values. (4th objective of SCBA)B. L-M Approach:

I.M.D Little & J.A.Mirlees have developed this approach for analysis of Social Cost-Benefit in Manual of

Industrial Project Analysis in Developing Countries and Project Appraisal & Planning for Developing

Countries.