Measuring changes in economic welfare: consumer and producer surplus

The object of this book is to consider the general principles underlying social cost-benefit analysis and to discuss the application of those principles to project appraisal and policy evaluation in developing countries. Social cost-benefit analysis is concerned with the evaluation of policies, programmes or projects by governments or public sector agencies. The general procedure for such an analysis is to consider the costs and benefits of a given policy measure – for instance, a tariff reform, a fertiliser subsidy for farmers, the construction of a cement factory or a rural health clinic – and to compare the benefits with the costs. The difficulty of evaluating social costs and benefits will vary with the project: the social value could simply be the real value of the physical inputs and outputs of a proposed manufacturing plant, or the costs and benefits may be intangible ones, such as the environmental costs of pollution or the benefits from improved health services. Whatever the problems of evaluation, the underlying principle is the same in all contexts: if the benefits exceed the costs, then the project is deemed socially worthwhile. As a general statement of principle, the view that the benefits from public sector intervention should exceed the costs would appear to be self-evident. Closer consideration, however, reveals that a formal cost-benefit analysis involves making value judgements which are not necessarily uncontroversial.