Social cost benefit analysis (scba)

Social cost benefit analysis, Advantages, disadvantages. Importance (rational ) to SABC, UNIDO Approch, LMR Approch.

1. SOCIAL COST BENEFIT ANALYSIS (SCBA) By: Narayan Gaonkar

2. Social cost benefit analysis (SCBA)called Economic analysis, is a methodology developed for evaluating investment projects from the point of view of the society as a whole. SCBA aids in evaluating individual projects within the planning framework which spells out national economic objectives and broad allocation of resources to various sector. In other words , SCBA is concerned with Tactical Decision making within the framework of macro level. Meaning:

3. Advantages The ability to identify the projects that maximize the welfare of the country . The ability to objectively assess and quantify the purpose projects in relation to community needs . Exposure of the basis for decision-making for projects and opportunity for public criticism . Ability to rank and prioritize limited resources so that the maximum benefit is realized.

4. Disadvantages Difficulty in measuring social costs and benefits and converting them in to monitory term . Over statement of the value of social benefits Complexity Conflict between social welfare and financial justification.

5. Approach's of SCBA : 1.Rationale for SCBA 2.UNIDO approach 3.Net benefit in terms of economic prizes 4.Saving impacts and its value 5.Income distribution impact 6.Adjustment for merit and demerit goods 7.Little-Mirrlees approach 8.Shadow prices 9.SCBA by financial institutions 10.Public sector investment decisions in India

6. 1.Rationale for SCBA In SCBA the focus is on the special costs and Benefits of the project. The principle sources of discrepancy are: Market imperfections Externalities Taxes and subsidies Concern for savings Concern for redistribution Merit wants.

7. Market imperfections: When imperfection exits, market price do not reflect social values. The common imperfections found in developing Countries are : Rationing: Rationing of a commodity means control over its price and distribution .The price paid by a consumer under rationing is often significantly less Than the price that prevail in the competitive market . Prescription of minimum wage rates : When minimum wages would be in a competitive labour market free from such wage legislations .

8. Foreign exchange regulation: The official rate of foreign exchange in most of the developing countries, which exercise close regulation over foreign exchange ,typically less than the rate that would prevail in the absence of foreign regulation . That is why foreign exchange usually commands a premium in unofficial transactions. Externalities: A project may have a beneficial external effects. For example, it may create certain infrastructural Facilities like roads which benefit the Neighbouring areas. Such benefits are considered in SCBA , though they are ignored in assessing the Monetary benefits to the project sponsors because they do no receive any monetary compensation from those who enjoy the external benefit created by the Project . Likewise, a project may have harmful effect like environmental pollution .

9. Taxes and Subsidies From the private point of view ,taxes are definite monetary costs and subsidies are definite monetary gains. From the social point of view, However ,taxes and subsidies are generally regarded as transfer payments and hence considered irrelevant. Concern for savings: A rupee of benefits saved is deemed more valuable than a rupee of benefit consumed. The concern of society for saving and investment is dully reflected in SCBA wherein a higher a valuation is placed on saving and lower valuation is put on consumption.

10. Concern for Redistribution: The society is concern about the distribution of benefits across different group. A rupee of benefit going to an economically poor section is considered more valuable than a rupee of benefit going to an affluent section. Merit wants: Goals and preferences not expressed in the market place, but believed by policy maker to be larger interest . For ex: Govt. may promote an adult education programme or balanced nutrition programme for school –going children even though these are not sought by consumer in market place .

11. 2. UNIDO Approach : UNIDO approach was first articulated in the Guidelines for Project Evaluation which provides a comprehensive framework for SCBA in developing countries .UNIDO approach is based largely on the latter publication though at places we will draw on the former publication too. Measures cost and benefits in terms of domestic rupees Measures cost and benefits in terms of consumption. Focuses on efficiency, savings and redistribution aspects in different stages.

12. UNIDO method of project appraisal involves five stages: Calculation of the financial profitability of the project measured at market prices. Obtaining the net benefit of the project measured in terms if economic (efficiency) prices. Adjustment for the impact of the project on savings and investment. Adjustment for the impact of the project on income and distribution. Adjustment for the impact of the project on merit goods and demerit goods whose social values differ from their economic values.

13. Net benefit in terms of economic prizes Choice of Numeraire One of the important aspects of shadow pricing is the determination of the numeraire , the unit of account in which the value of inputs or outputs is expressed. To define the nummeraire ,the following questions have to be answered: What unit of currency , domestic or foreign, should be used to express benefits or costs? Should costs and benefits be measured in current values or constant values ? Should the income of the project is measured in terms of consumption or investment?

14. Concept of tradability A key issue in shadow pricing is whether a good is tradable or not . For a good that is tradable, the international price is a measure of its Opportunity cost to the country. Why? For a tradable good, it is possible to substitute import for domestic production and vice versa . Sources of shadow prices The UNIDO approach suggests three sources of shadow pricing, depending on the impact of the project on national economy .A project , as it uses and produces resources, may for any given input or output Increase or decrease the total consumption in the economy . Decrease imports or increase imports . decrease or increase production in the economy .

15. When shadow prices are being calculated, taxes usually pose difficulties. The general guidelines in the UNIDO approach with respect to taxes are as follows: When a projects results in diversion of non-traded consumer goods taxes should be included. When a project augments domestic production by Other producers, taxes should be excluded. For fully traded goods , taxes should be ignored. Treatment of Taxes

16. Impact on Distribution Measure of gain or loss: Difference between price paid and value received. Impact on saving: Its seek to answer fallowing question- Given the income distribution project what would be its effect on saving? What is the value of such saving? Impact of the project on savings and investment

17. Adjustment for merit and demerit goods Merits good is one for which the social value exceeds the economic value. Demerits good is one social value of goods is less than the economic value. Income distribution impact Redistribution of income in favour of economically weaker sections.

18. I.M.D Little and J.A Mirrlees have developed an approach to social cost benefit analysis which became popular as Little- mirrlees approach (L-M approach). There is a considerable similarity between the UNIDO approach and L-M approach. Both approaches call for: Calculating accounting (shadow) prices particularly for foreign exchange savings and unskilled labour. Considering the factor of equity. Use of DCF analysis. 3. Little- Mirrlees approach:

19. Differences between UNIDO approach and L-M approach UNIDO approach is limited to domestic boundaries (measures cost and benefits in terms of domestic rupees) where as, L-M approach considers international aspects also (measures cost and benefit in terms of international/border prices). UNIDO approach measures cost and benefits in terms of consumption where as, the L-M approach measures cost and benefits in terms of uncommitted social income. The UNIDO approach focuses on efficiency, savings and redistribution aspects in different stages. L-M approach tends to view these aspects together.

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