Social Cost-Benefit (SCB) Analysis: With Illustrations

This article provides notes on the Social Cost-Benefit (SCB) Analysis.

Social cost-benefit analysis has been defined in many ways by various exponents. It is defined— “as a methodical and rational process of identifying, evaluating and assessing the benefits (outputs) and costs (inputs) associated with alternative activities which will effec­tively accomplish economic targets and social goals.”

Social cost-benefit analysis is a relatively new concept and as such there is a divergence of opinion on various assumptions. It is a kind of economic measurement (by way of analysis) of costs and benefits of the private sectors’ social responsibility performance designed in addition to the traditional financial and cost accounting.

According to Michael Alexander, the expression implies a methodology of project evaluation which takes into account costs and benefits beyond the books of accounts.

Presently, the appraisal process of a private concern’s project takes into account:

Financial aspects—i.e.. viability on the basis of return on investment, etc.

Commercial aspects—i.e. marketing plan and strategies, etc., and

Technical aspects—i.e. project specification of technical parameters.

But it ignores the socio-economic aspect—i.e. whether the project is socially desirable and worthwhile in the perspective of national economy. The evaluation process does not consider the social costs—costs of external diseconomies (say, shifting of labour from one economy to other sector).

Illustration:

The employment of one labourer by a commercial enterprise deprives society from the benefits it was receiving earlier from him engaged in other sectors of economy (say, agriculture). Thus, cost to the society (i.e. social costs) can be best defined by the benefits deprived through the use of any facility by an industrial sector.

Benefits can be defined by the goods and services contributed in real terms by such sector. The real costs of scarce and surplus resources used in a project are opportunity cost and shadow price. So the net benefit to the society is the excess of benefits over costs (sum of input costs and social costs).

Purposes of SCB Analysis:

These are:

(a) To determine and measure the expected future economic and social benefits that may be derived from an intended project or activity.

(b) To determine and measure the flow of future economic and social costs that would be incurred to accomplish the benefits.

(c) To ascertain the net benefits as a result of the above assessment.

(d) To range the net benefits that may be realised from each of the alternative projects or activities under consideration.

(e) To arrive at a decision as to which of the projects or activities will yield the maximum benefits in relation to set economic standards and defined social goals for the national economy.

Basic Requirements (essentials) of SCB Analysis: A number of elements are basically essential in undertaking a SCB Analysis.

These are as follows:

(i) Identify and define the objectives of the project or intended activity.

(ii) Identify and measure the future benefits—direct and indirect in nature.

(iii) Identify and measure the relevant costs—direct and indirect (and imputed).

(iv) Ascertain the present value of net benefits including the choice of a discounting factor.

(v) Apply analytical appraisal of economic, social and environmental factors.

SCB Analysis Techniques:

In relation to the analysis of projects for social profitability via SCB Analysis, the following techniques are available:

(i) UNIDO Methodology

(ii) Little and Mirrlee’s approach

(iii) Indian Planning Commission methodology

The approaches advocated by the above are same in nature in the sense that they consider distortions in values of foreign exchange, savings and unskilled labour and carry out corrections in a similar way.

UNIDO method—uses the equivalent consumption at critical consumption level. By an application of DCF technique the social IRR (internal rate of return) can be calculated as the yardstick for measurement.

L & M method—uses the uncommitted social income in free foreign exchange at the hands of the Government. This can be in improved by the DCF technique.

Indian Planning Commission’s Method—uses the uncommitted social income at the hands of the Government but revalued at shadow exchange rate.