Project Management

Social Cost
Benefit Analysis
Meaning & Introduction
SCBA, called economic analysis, is a
methodology developed for evaluating
investment projects from the point of view of
the society as a whole.
SCBA is the tool which help the government
to evaluate the project which spells national
benefits.
Meaning & Introduction
(SCBA)
The term social costs refers to all those
harmful consequences and damages which
the community on the whole sustains as a
result of productive processes and for which
private entrepreneurs are not held
responsible manifested.
Meaning & Introduction
(SCBA)
The SCBA is a tool for evaluating the value
of money, particularly of public investments,
in many economies.
SCBA has achieved a significant importance
in view of the growing importance of public
investments in many countries, particularly in
developing countries.
Objectives of SCBA
1. Estimates of costs and benefits which will
accrue to individual members of the society
as consumers or as suppliers of factor
input.
2. Estimates of cost and benefits which will
accrue to the project-implementing body.
Objectives of SCBA
3. Estimates of cost and benefits which will
accrue to the community.
4. Discounting the cost and benefits which
accrue over a period of time to determine the
feasibility of the project.
5. Estimates overall benefits to the society as a
whole.
Methods of SCBA
1. Rational for SCBA
2. UNIDO approach
3. Net benefit in terms of economic prices
4. Income distribution impact
5. Adjustment for merit and demerit goods
6. Shadow Pricing
Shadow Pricing

Shadow pricing is one of the most widely
used methods of social-cost benefit analysis.

This technique involves the use of
hypothetical rather than predicted actual
prices when evaluating a project.
Shadow Pricing
Shadow pricing technique has considered as
the best suitable technique, since they are a
better reflection of the real costs of inputs to
society and the real benefits of the output to
society than actual prices.
The term shadow price suggests that an
analysis based on these prices is remote
from reality and, therefore, academic and
highbrow (intellectual, scholar, educated).
Shadow Pricing

Shadow prices are unreal prices in that they
are not the current prices of goods in the
market.

Important aspects of Shadow pricing

1. Choice of numeraire: Determination of the
unit of account in which the value of inputs
or outputs is expressed.

2. Concept of tradability: Determine whether
the goods are tradable or not.

Important aspects of Shadow pricing
3. Sources of shadow prices: UNIDO approach
suggests three sources of shadow pricing,
depending on the impact of the project on
national economy.
a. increase or decrease the total
consumption in the economy
b. decrease or increase production in the
economy
Important aspects of Shadow pricing
c. decrease or increase imports
d. decrease or increase exports
- If the impact of the project is on consumption
in the economy the basis of shadow pricing
is consumer willingness to pay
- If impact is on production the basis would be
cost of production

Important aspects of Shadow pricing

- If impact is on international trade, the basis
would be foreign exchange/currency.
4. Taxes: a. When a project results in diversion
of non-traded inputs which are in fixed supply
from other producers, taxes should be
included.

Important aspects of Shadow pricing

b. when a project augments domestic
production by other producers, taxes should
be excluded.

c. for fully traded goods, taxes should be
ignored.
UNIDO Approach
(United Nations Industrial Development
organization)

UNIDO approach is concerned with the
determination of the net benefit of the project
in terms of economic prices.

UNIDO as a technique facilitate
comprehensive framework to SCBA in
developing countries.
UNIDO Approach
(United Nations Industrial Development
Organization)
The UNIDO method of project appraisal
involves five stages:
1. Calculation of the financial profitability of
the project measured at market prices.
2. Obtaining the net benefit of the project
measured in terms of economic prices(also
called shadow prices.

UNIDO Approach
(United Nations Industrial Development
organization)
3. Adjustment for the impact of the project on
savings and investments.
4. Adjustment for the impact of the project on
income distribution.
5. Adjustment for the impact of the project on
merit goods and demerit goods whose social
values differ from their economic values.