Cost-benefit analysis is a technique that assigns a monetary value to all benefits and costs for an investment to assess its economic value. Also referred to as benefit-cost analysis, it is also used to evaluate an investment's relative value as compared with other investments. The rationales used to justify cost-benefit analysis include financial and moral perspectives, according to David Copp in the research article "Morality, Reason, and Management Science: The Rationale of Cost-Benefit Analysis."
A financial rationale is often used to justify the use of a cost-benefit analysis. By assigning monetary values to all costs and benefits, cost-benefit analysis assesses the profitability of proposed projects or programs to evaluate whether the prospective financial returns are worth the allocation of resources. This type of financial analysis is also used to determine whether monetary grounds exist to justify continuing an activity. Here, cost-benefit analysis serves as a tool to reduce economic waste.
A moralist rationale for cost-benefit analysis looks to its ability to allocate cost values that might address ethical concerns raised by proposed activities, policies, projects or programs. For example, in assigning costs and benefits for a proposed construction project, the potential for environmental damages can be allocated a cost that allows decision makers to more objectively evaluate whether the project's overall values are worth the potential environment damages.
Comparing competing projects without including the subjective view of the analyst is difficult. Rationalists view cost-benefit analysis as a way to contribute to the selection of social policies and projects that are socially rational. The socio-economic benefits and costs of a program, project, policy or activity can be assigned quantitative values that allow for a more objective estimation of potential outcomes that can then be used when comparing between alternatives.
Cost-benefit analysis provides an aid to risk management because it primarily measures the effectiveness and efficiency of an activity as well as serving as a comparative tool when choosing between alternative activities. The cost-benefit analysis process becomes a risk analysis tool because it provides an in-depth evaluation of the costs of a given activity, which provides an additional rationale for its use.
Vanessa Cross has practiced law in Tennessee and lectured as an adjunct professor on law and business topics. She has also contributed as a business writer to news publications, including the "Chicago Tribune," and published in peer-reviewed academic journals. Cross holds a B.A. in journalism, a Juris Doctor and an LL.M. in international business law.