What is cost-benefit analysis? Suppose that you were asked to do a cos

What is cost-benefit analysis? Suppose that you were asked to do a cost benefit analysis of tearing down an elderly woman’s ancestral home to provide space to expand a local high school. What difficulties might you encounter?

What will be an ideal response?

ANSWER

In cost-benefit analysis, a dollar value is placed on all the costs and benefits associated with a particular project. If the benefits of an action are greater than the costs of an action, it is in the public interest (according to the criterion). In the case above, the main difficulty would be in placing a dollar value on the woman’s home as compared to the dollar value of the expanded school. Being here ancestral home, the woman probably places a high value on the house, probably much higher than market value. On the other hand, hundred s of students will gain enjoyment from the expanded school and it would be very easy to overstate their potential benefits since a small change in the enjoyment they each get from the expanded school will be multiplied across many individuals.