Explain the difficulties of carrying out cost-benefit analysis. [8]

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1. Explain the difficulties of carrying out cost-benefit analysis. [8]

Cost-Benefit analysis is a systematic method of analysis the potential social costs and benefits to a given decision, usually an investment project. It involves evaluation of these costs and benefits together with a comparison to the costs and benefits of alternatives in order to determine whether the given decision is justifiable.

The process has multiple steps, it starts off by identifying the potential groups of people who are likely to be affected by the decision (IDK if stakeholders is an appropriate term in econ). Then, one the groups in question are determined, the potential costs and benefits start to be identified. In the case of a highway, for example, the benefit of faster and more efficient commutes, transportation and travel will likely be identified together with the potential costs associated with deforestation, such as fewer camping and hiking trails, or the costs associated with building the highway, such as pollution. These costs and benefits are then assigned an appropriate monetary value in order to allow for more objective comparison. The final step before their evaluation is a forecasting of the costs and benefits in the future, which will also be accounted for in the monetary value. Then, once all of the values have been determined, the costs and benefits are weighed up against what would be considered acceptable, together with the costs and benefits of other projects in order for a decision to be made.
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One potential difficulty arising from this system is the inherent inaccuracy of attempting to put a monetary value on a social costs or benefit. It is arguable that a faster commute to work has anywhere from no value to an incredibly high value depending on how much any individual analyst values their time. Similarly, it can be argued that the cost of not having to face pollution and the ability to enjoy clean air is virtually priceless, or, at the very least, incredibly valuable. Thus, accurate appraisal of the value of many social costs and benefits is very ...

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