The Valuation of Costs and Benefits

The basic decision rule so far derived requires that benefits and costs be expressed in monetary units for each period of time over the economic life of the project, and that these values be discounted by some chosen SDR to obtain a net present value of social benefits. In order that this decision rule be consistent with the objective function of maximising social welfare, it is necessary that the prices attached to the physical benefits and costs reflect society’s valuations of the final goods and resources involved. Two questions immediately arise : 1. If markets do exist, to what extent will observed market prices reflect social valuations? 2. If markets do not exist, how are surrogate prices to be derived which, in turn, reflect social valuations?