- We have examined what Cost Benefit Analysis is and in that introduction, we made it clear that CBA is useful but not without its own limitations
- Here we will now examine the limitations of Cost Benefit Analysis and its benefits
- To help you understand we have used examples for each point
Benefits/Advantages of Cost-Benefit Analysis:
- Helps decision-makers compare the costs and benefits of different projects, allowing them to choose the one that maximizes net benefits. For instance, Air Zimbabwe could use a CBA to compare the costs and benefits of different aircrafts for its fleet renewal project, ultimately choosing the option that provides the greatest net benefits.
- CBA can help to identify and quantify both tangible and intangible benefits, such as improved safety, enhanced reputation, or increased access to markets. For example, when deciding whether to invest in new routes, Air Zimbabwe could use a CBA to identify and quantify the benefits of improved connectivity and increased tourism, as well as the direct financial costs and benefits.
- CBA can provide a transparent and objective method for evaluating the economic efficiency of a project and can be used to demonstrate the rationale for public investments to stakeholders. For instance, if the government of Zimbabwe decides to invest in Air Zimbabwe, it could use a CBA to justify its decision by showing that the benefits of the investment outweigh the costs.
Drawbacks/Disadvantages of Cost-Benefit Analysis:
- The accuracy of the results depends on the accuracy of the assumptions and estimates used in the analysis. For instance, if the projected costs or benefits turn out to be significantly different than expected, the results of the CBA may no longer be valid.
- There may be difficulties in measuring and comparing some of the benefits, particularly those that are intangible, such as improved customer service or brand value. For example, Air Zimbabwe may find it difficult to accurately quantify the benefits of improved customer service, which could lead to an incomplete or misleading CBA.
- CBA may not take into account non-economic or ethical considerations, such as the impact of the project on the environment or on social equity. For instance, if Air Zimbabwe is considering a new route that would have a significant environmental impact, the CBA may not adequately capture the true costs of the project to society as a whole.