Social Cost Benefit Analysis

It is a methodology developed for evaluating investment projects from the point of view of society as a whole

Introduction
 It

takes into account indirect costs and indirect benefits to the nation.  Example:construction of bridge over a river,manufacturing soap,pharmaceutical unit producing life savings drug

Objectives
 

 

Contribution of the project to the GDP of the economy. Contribution of the project to improve the benefits to the poorer sections of the society and to reduce the regional imbalances in growth and development. Justification of the use of scarce resources of the economy by the project. Contribution of the project in protecting/improving the environmental conditions.

Approaches
 UNIDO

Approach  Little-Mirrlees Approach Little-

UNIDO Method
It consists of the following stages 1.Calculation of financial profitability of the project based on market prices. 2.Obtaining the net benefit of the project measured in terms of economic prices,also referred to as shadow prices. 3.Adjustment for the impact of project on savings and investment. 4.Adjustment for the impact of project on income distribution. 5.Adjustment for the impact of the project on merit goods and demerit goods whose social values differ from their economic values.

Shadow prices
 The

corrected market prices of both inputs and outputs of a project known as shadow prices.  Choice of Numeraire  Concept of tradability  Taxes  Consumer willingness to pay.

Sources of shadow prices



Impact of project is in cosumption in the economy Impact of project is on production in the economy Impact of project is on international trade

Consumer willingness to pay Cost of production

Foreign exchange value

Shadow pricing of specific resources



Tradeable inputs and tradeable outputs

Border price translated,in domestic currency at the market exchange rate Consumer willingness to pay Indirect means

NonNon-Tradeable inputs and outputs Externalities

 

labour Inputs
 

Taking labour away from other employments Inducing the production of new workers

 

What other users of labour are willing to pay for this labour The marginal product of worker in the previous employment+the value assigned by the worker on the leisure+the additional consumption of food when the worker is fullyemployed+the cost of transport and rehabilitation+the cost of training a worker+the increased consumption by the worker The wage they command

Import of foreign workers

Capital inputs


Physical assets

Same as of fully traded and nonnontraded goods Consumption rate of interest Investment rate of interest

Opprtunity cost of capital

 

Foreign exchange
 The

shadow price of a unit of foreign excange=F excange=Fi QiPi  Fi=fraction of foreign exchange,at the margin,spent on importing commodity I  Qi=quantity of commodity i that can be bought with one unit of foreign excange=1/CIF value  Pi=domestic market clearing price of commodity

Savings impact
 What

would be the projects effect on savings?  What is the value of such savings to the society?

Income distribution impact

 Deciding

the relative value of income for different groups

Adjustment for merit and demerit goods

 Estimate

the economic value  Calculate the adjustment factor as the difference between the ratio of social value and economic value and unity  Economic value* adjustment factor  Add the adjustment to NPV

Little Mirrlees Approach

Measures costs and benefits in terms of intrnational price Traded goods-border price goodsgoods exported-F.O.B price exportedgoods imported-C.I.F price importedNonNon-Tradeable goods-arrived in terms of goodsmarginal social cost and marginal social benefit

L-M shadow wage rate

 SWR=c-1/s(c-m) SWR=c-1/s(c c=additional

resources devoted to

consumption  1/s=value of a unit of committed resource  c =consumption of a wage earner  m =marginal product of the wage earner

S.C.B analysis Indian scenario

 Indian

financial institutions use the following criteria economic rate of return effective rate of protection domestic resource cost