Social Cost Benefit Analysis

1 PRESENTED BY ANUP KUMAR OJHA MBA IV

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2/21/2012

INTRODUCTION
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Social Cost Benefits Analysis means to analyze the

social cost and total social benefits if we accept any project. We all know that for completing the big project, we need big investment. In social cost benefit analysis (SCBA), we see whether return or benefits on this investment are more than its cost from point of view of society in which we are living.

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ADVANTAGE OF SCBA
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In

public investment, we analyze and compare government expenditure with total benefits to society through SCBA. It is also good technique of financial evaluation of a project because we leave that project whose benefits to society are less than total cost which will to society because all resources are from society. Problems which can be solved by Social Cost Benefits Analysis

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What is social cost benefit analysis?

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It refers to the study of feasibility of a project in

terms of its total economic cost and total economic benefits. it means to compare total cost with total benefit if we add external cost with private cost, its called total social cost if we add external benefit with private benefit, called total social benefit.

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1st Problem: Rationale for SCBA

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a) Market imperfection :We will not analyze social cost benefit; we can not find market imperfections.

After study of market rates following factors come in to our knowledge. i) Rationing factor : It means some of raw material prices are controlled by Govt. So, it may increase our project cost but its social benefit will go to poor community. ii) Regulation for providing minimum wage factor: It also affects social cost and benefits of any project. Because company must have to pay this minimum wages.

iii) Foreign Exchange Regulations factor: Sometime, we have to deal at currency rate which is less than actual market rate due to regulation on FOREX. So, we should analyze this point also.
b) Externalities :Externalities are non-cash or benefits which an organization suffer or get if it starts the project. For example, if govt. makes road near your project plant, you can get this facility without any payment. On the other side, if any other organization is polluting and spreading diseases, its cost may suffer due to absence of your employee for going to hospitals. c) Tax and Subsidies: Tax is payment on the earning of the project and it will reduce our overall benefits. On the other hand, if govt. gives us subsidy for operating any project, it will count for our cost benefit analysis.

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2nd Problem: What is net benefit to society from a project?

With UNIDO approach, we can evaluate net benefit from any project. Formula is given below 6

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3rd Problem: To Know the Effect of using one more Unit of Resources
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With shadow price, we know the effect of using one

more unit of resources on the social cost and benefits. Shadow pricing is relating to decision of project manager. Before accepting the project, we have to find the price if we have to use extra unit of resources. Suppose, we have to use one more hour of labor, what will we pay and what will its effect on social benefits.

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More Resources of Analysis in Finance:

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1. Fund Flow Analysis 2. Break Even Point Analysis 3. Option Analysis 4. Decision Tree Analysis 5. Investment Analysis 6. Leverage Analysis 7. Financial Analysis 8. Ratio Analysis 9. Cash flow Analysis 10. WCM Analysis

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So what makes things more complex? There are a variety of factors:

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Benefits and costs may accrue to different sets of

people. If this is so we need some way to aggregate and compare different benefits and costs across people. Benefits and costs may occur at different points in time. In this case we need to compare the value of outcomes at different points in time.

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Benefits and costs may relate to different types of

goods and it may be difficult to compare their relative values. This usually occurs when one of the goods does not have an obvious and agreed upon price. For example, we may be spending standard capital goods today in order to obtain environmental benefits tomorrow.

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Benefits and costs may be uncertain.

Benefits and costs may be difficult to calculate and,

as a result, there may be widely differing views about their sizes. One might think this could be subsumed under uncertainty, however the two points are rather different: two people agreeing that an outcome follows some probability distribution is different from them arguing about its mean and variance.

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Usually, in real-world cases the dominant issue is

usually the last one: the basic job of calculating estimates for the project's costs and benefits. This especially true in the 'social' case where the projects under consideration may involve costs and benefits that very difficult to quantify { what is the benefit of the national security derived from military spending, how large are the benefits from education, etc etc. Necessarily this quantification only makes sense on a case-by-case basis..
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Example of cost benefit Analysis

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Social Cost Benefit Analysis of the POSCO

Steel Project in Orissa

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Approach for LeastCost and Economic Analyses-POSCO Steel Project in Orissa

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Financial and Economic Analysis

The economic analyses of projects is similar in form

to financial analyses. Both appraise the profits of investments. But the concept of financial profit is not the same as economic profit. The financial analysis of a project estimates the profit accruing to the projectoperating entity or to the project participants, whereas economic analysis measures the effect of the project on the national economy.

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Thank You
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