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Social Cost Benefit Analysis

>> November 26, 2010

Social Cost Benefits Analysis means to analyze the social cost and total social benefits if we accept any project. We all know that for completing the big project, we need big investment. 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.

Problems which can be solved by Social Cost Benefits Analysis

1st Problem: Rationale for SCBA

a) Market imperfection :

We will not analyze social cost benefit; we can not 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.

2nd Problem: What is net benefit to society from a project?

With UNIDO approach, we can evaluate net benefit from any project. Formula is given below

3rd Problem: 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.

More Resources of Analysis in Finance:
1. Fund Flow Analysis
2. Break Even Point Analysis
3. Option Analysis
4. Decision Tree Analysis
5. Investment Analysis
6. Leverage Analysis
7. Financial Analysis
8. Ratio Analysis
9. Cash flow Analysis
10. WCM Analysis

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