Benefits and costs
Measuring benefits and costs
An appraisal should take into account both monetisable and unmonetisable benefits and costs. Monetisable costs and benefits are those that can be expressed as a monetary value (i.e. £s) either directly from market prices or indirectly by “non-market valuation methods”. Broadly speaking these can monetised in two ways:
- market prices – many benefits and costs can be measured directly from their market value. For example, if broadband enables a business to become more 1% productive, then this can be measured by comparing the value of the business’ output relative to the value of its inputs. In other words, the extra economic activity has a market value. Similarly, capital investment by the Scottish Government in rural broadband infrastructure is a cost that can be valued as it involves purchasing goods and services that have a market value
- non-market valuation – many costs and benefits do not have a direct market price, however they can be monetised by using a number of analytical techniques. For example, given social media platforms are free to the user, some studies use “willingness to pay” methodologies (e.g. surveys) to gauge how much users would pay for the service if they had to
Many costs and benefits, however, can’t be quantified. For example, it is difficult to put a value on fairness, accessibility or damage to wildlife in a local area. It is crucial to account for these benefits as well as those accounted for the quantifiable cost-benefit analysis. Indeed, it may be the case that a project has quantifiable benefit-to-cost ratio of less than one (the costs outweigh the benefits), but is still worthwhile if there are significant unmonetisable costs and benefits a project may still be worthwhile.
More detail on the various techniques can be found in Green Book appraisal guidance.
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