What is Cost-Benefit Analysis?
Cost-Benefit Analysis is a technique designed to determine the feasibility of a project or plan by quantifying costs and benefits including external costs and benefits.
It essentially compares the costs and benefits of a project and then makes a decision on whether or not to proceed with the project.
How to do a Cost-Benefit Analysis?
To do a cost-benefit analysis, you do the activity if the Marginal Benefit ≥ Marginal Cost
Suppose you are presented with two investment opportunities:
Project #1:
Total benefits = $20,000
Total Costs = $12,000
Project #2:
Total benefits = $30,000
Total Costs = $45,000
Between both cases, you would do Project #1 as it has a Net Benefit of $8.000 ($20.000-$12.000 = $$8.000) and wouldn’t do Project #2 as it had a negative net value.
In Economics you keep buying if you perceive to gain value from the transaction. So the Consumer Surplus is positive.
