Cost Benefit Analysis:It is a decision making tool for accounting for the social costs and social benefits of a project over time to establish a Net present value(NPA).
Example- Lets take 3 jars named as A,B and C.In jarA there is $15,Jar B -$12,Jar C-$10.Which one will the economist choose??
Rationally he would pick JarA because ...
In case of Jar A:
Benefit $15
OPP cost -$12(next best alternative)
Economic surplus-$3
In case of Jar B:
Benefit-$12
OPP cost-$15(best of the rest)
Economic surplus-(-$3)
In case of Jar C:
Benefit-$10
OPP cost-$15(best of the rest)
Economic surplus-(-$5)
From this we came to know that Cost benefit Analysis (CBA) allows us to think like economists.
And we should choose the option where benefits outweight cost.
Example- Lets take 3 jars named as A,B and C.In jarA there is $15,Jar B -$12,Jar C-$10.Which one will the economist choose??
Rationally he would pick JarA because ...
In case of Jar A:
Benefit $15
OPP cost -$12(next best alternative)
Economic surplus-$3
In case of Jar B:
Benefit-$12
OPP cost-$15(best of the rest)
Economic surplus-(-$3)
In case of Jar C:
Benefit-$10
OPP cost-$15(best of the rest)
Economic surplus-(-$5)
From this we came to know that Cost benefit Analysis (CBA) allows us to think like economists.
And we should choose the option where benefits outweight cost.
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