Cost-benefit analysis is a technique used to help governments decide whether to go ahead with various projects such as a new motorway, a bypass, an underground line, a hospital, a health-care programme, a dam, and so on.

Stages

Identify all costs and benefits

The first stage is to identify all of the relevant costs and benefits arising out of any particular project.

The private costs
The private benefits
The external costs
The external benefits.

An issue with externalities is that it is difficult to put a cost upon it. How do you put a monetary value on air pollution?

Monetary value

The second stage involves putting a monetary value on the various costs and benefits.

Decision making

The results of the earlier stages are drawn together so that the outcome can be presented in a clear manner in order to aid decision making.