What is a Cost-Benefit Analysis?

Economists recommend using cost-benefit analysis when identifying the "best" solution, whether it is for personal decisions or for government policies. The costs of the program are subtracted from the benefits. If the result is negative, then not proceeding is the correct decision. If there are more than one option, and several are positive, then the one with the greatest benefit should be pursued. Simple, rational solution which works every time; that is in theory. The challenge is quantifying the costs and benefits.Most of us have listed the pros and cons at some point when faced with a decision. Go ahead, make your list. Now try to quantify in monetary terms each of the items listed. You have just performed a cost-benefit analysis. For example, assume you are trying to determine what college to attend, and you list out the following costs and benefits of two schools.





School 1 School 2



Benefits

Beautiful Campus

Academic Reputation

Athletic Program

Friends attending

Ease to get a job after graduation

Extracurricular Activities

Total Benefits

Costs

Tuition

Travel

Housing

Scholarship

Total Costs



Go ahead and complete the table. Tough isn't it. There are many items such as the beauty of the campus, ease to get a job after graduation, and extracurricular activities that are hard to quantify. Others like tuition, travel, housing, and scholarship are easy to value.



The challenge to a cost-benefit analysis is quantifying the costs and benefits