Cost-Benefit Analysis

Discipline: Economics

First examined by French engineer and economist Jules Dupuit (1804-1866) and later developed by 20th century economists, cost-benefit analysis is the determination of the total value of a proposed investment's inputs and outputs.

Cost-benefit analysis examines opportunity costs, externalities, shadow prices and estimates of future interest rates.

Cost-benefit analysis is made to determine whether the costs of a project or operation is on an acceptable level in comparison to the benefits it is planned to provide. Cost-benefit analysis can be run for different projects or operations in order for the results to be used for comparison.

The technique was first used in the assessment of projects under the US Flood Control Act, 1936, and received a firmer theoretical underpinning by English economist John Hicks (1904-1989) in a 1943 paper on consumer surpluses.

Also see: capital rationing, compensation principle, consumer surplus, social welfare function

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