Social Cost And Benefit Analysis

Rationale
 Concern for saving
• Private Firms :More Focus on Consumption
• Social point of View: A rupee of benefits saved
is deemed more valuable than a rupee of
benefit consumed
 Concern for Redistribution
• A private firm does not bother how its
benefits are distributed across various groups
in society.
SOCIAL COST BENEFIT ANALYSIS
• Present development level of country decide
about the selection of approach
• UNIDO approach focus on aggregate demand
because consumption is one of parameter to
measure standard of living
5 stages Of UNIDO Approach
• Example: A project of power station may
increase the production of electricity which
contributes to one of the socio-economic
objectives of the country.
Meaning of Shadow Price
Principle Of Shadow Pricing
 Example:
• Measurement of Gain or Loss: A project
appoints 1,000 laborers at a wage rate of Rs
150 per day. These workers were ready to
work for a daily wage of Rs 100. Therefore, the
gain of the group of 1,000 workers from the
project is {(150 - 100) × 1,000} = Rs 50,000 per
day
• Assuming that the worker group gains an
income of Rs2,50,000 from a project, the base
level of income is Rs 50,000 which has a
weight if 1.00 and elasticity of marginal utility
of income is 0.20.
• An alcohol factory is under construction. The present
economic value of the project is Rs237.78 crore (Adjusted
NPV up to stage 4). The output of the project has no social
value than its cost of production. Cost of production is the
60 percent of the economic price.
• Adjustment factor is:

• the adjusted value = (Rs 237.78 crore × - 0.40) = Rs 95.11

crore Therefore, the net present value of the project in
terms of socially acceptable consumption is Rs(237.78-
95.11) = Rs142.67 crore.
 Features:
• L-M methods opts for savings as the yardstick
of their entire approach.
• Present savings is more valuable to them than
present consumption since the savings can be
converted into investment for future.
• This approach measures the cost and benefits
in terms of international or border prices.
• Why Border prices? Because the border prices
represent the correct social opportunity costs
or benefits of using or producing a traded
goods.