Social Cost Benefit Analysis of a Project

The foremost aim of all the individual firm or a company is to earn  maximum possible return from the investment on their project. In this  aspect project promoters are interested in wealth maximization. Hence  the project promoters tend to evaluate only the commercial profitability of  a project. There are some projects that may not offer attractive returns as  for as commercial profitability is concerned but still such projects are  undertaken since they have social implications. Such projects are public  projects like road, railway, bridge and other transport projects, irrigation  projects, power projects etc. for which socio-economic considerations  play a significant part rather than mere commercial profitability. Such  projects are analysed for their net socio economic benefits and the  profitability analysis which is nothing but the socio-economic cost benefit  analysis done at the national level.

All the projects imposes certain costs to the nation and produces certain  benefits to the nation. The cost may be of two types i.e. direct cost and  indirect cost. In this respect the benefit derived from any project will also  be of two types i.e. direct benefits and indirect benefits.

The social cost benefit analysis is a tool for evaluating the value of  money, particularly of public investments in many economies. It aids in  decision making with respect to the various aspects of a project and the  design programmes of closely interrelated project. Social cost benefit analysis  has become important among economists and consultants in recent  years.

Features of  Social Cost Benefit Analysis

1. Assessing the desirability of projects in the public as opposed to the  private sector
2. Identification of costs and benefits
3. Measurement of costs and benefits
4. The effect of (risk and uncertainty) time in investment appraisal
5. Presentation of results – the investment criterion.

Stages of  Social Cost Benefit Analysis of a Project

1. Determine the financial profitability of the project based on the market  prices.
2. Using shadow prices for the resources to arrive at the net benefit of  the project at economic process.
3. Adjustment of the net benefit for the projects impact on savings and investment.
4. Adjustment of the net benefit for the projects impact on income  distribution.
5. Adjustment of the net benefit for the goods produced whose social  values differ from their economic values.

Limitations of  Social Cost Benefit Analysis

Social cost benefit analysis suffer from the following limitations.

1. The problems of qualification and measurement of social costs and  benefits are formidable. This is because many of these costs and  benefits are intangible and their evaluation in terms of money is  bound to be subjective.
2. Evaluation of social costs and benefits has been completed for one  project, it may be difficult to judge whether any other project would  yield better results from the social point of view.
3. The nature of inputs and outputs of projects involving very large  investment and their impact on the ecology and people of the  particular region and the country as a whole are bound to be differing  from case to case.