Question

Describe cost-benefits analysis and explain when is should be used and when it should be avoided.

Answer 1

Cost benefit analysis is a systematic approach to calculating the total costs and benefits associated with each alternative and calculating the ratio of costs to benefits (in present value terns)

If the ratio comes greater than 1, it means costs are greater than benefits and thus the alternative should not be chosen as it would lead to losses.

It is to be used in case of comparing future alternatives to chose for in case of investments and policy making.

It should be avoided when costs and benefits cannot be quantified or when time horizon is unknown.