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
- Assessing the desirability of projects in the public as opposed to the private sector
- Identification of costs and benefits
- Measurement of costs and benefits
- The effect of (risk and uncertainty) time in investment appraisal
- Presentation of results – the investment criterion.
Stages of Social Cost Benefit Analysis of a Project
- Determine the financial profitability of the project based on the market prices.
- Using shadow prices for the resources to arrive at the net benefit of the project at economic process.
- Adjustment of the net benefit for the projects impact on savings and investment.
- Adjustment of the net benefit for the projects impact on income distribution.
- 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.
- 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.
- 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.
- 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.