Cost-Benefit Analysis (CBA) (Economics)

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  • An economic theory that maintains that rational individuals base their decisions on the comparison of costs and benefits. Beyond the realm of individual or private CBA, public decisions made by governments are classified as social CBA. Social CBA has implications for nonmarket participants and the use of scarce resources.

    Externalities are generated when nonmarket participants incur part of the costs of market transactions and governments will have to decide whether to tax or subsidize a particular activity. Such a decision is normally evaluated on the basis of social cost versus social benefit. To encourage or discourage any activity, a planner must know the social value (shadow price) of the activity. If the market price is less than the social value, the scale of the activity should ...

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