Cost Benefit Analysis

A topic that often seems a bit of an ‘add-on’ to the syllabus, cost-benefit analysis is a relatively simple but important economic concept.

This video by PJ Holden explains it well (as usual):

HS2 provides a great case study for cost benefit analysis. This detailed document shows the depth to which analysis takes place, but also provides indications of the limitations of the approach. The key information for you has been highlighted for you.

You need to know how CBA is conducted, the stages involved and the benefits and limitations of its use. 

This is an exam question that is often overlooked, but provides plenty of scope for application and evaluation without the need for detailed theoretical knowledge. Here’s a typical exam question (from AQA):

a) Explain the main principles that would be involved in a cost-benefit analysis (CBA). (15 marks)

b)In December 2010, the Federation of Small Businesses estimated that UK industry had lost at least £1 billion due to the disruption caused by one week’s heavy snow. It was suggested that both product markets and labour markets would benefit from investment in snow-clearing equipment. Evaluate the advantages and disadvantages of using CBA when deciding whether or not to invest in snow-clearing equipment. (25 marks)