some examples of how this problem has been approached in recent analyses of
significant public activities.
7.2 The Benefit-Cost Viewpoint
In the following paragraphs, the word “good” is used to describe any entity preferred
by a company, society, group or individual. Some goods can be obtained for free, or
nearly so. Here, the goods are considered sufficiently expensive (monetary or other
terms) to require the consumer to try to be efficient when buying the goods. When a
rational consumer needs to choose among two or more goods, all satisfactorily
meeting some or all of the same required or preferred objectives, he will try to
choose the “best” one among them. What criteria should he use to do this?
If all goods provide the same benefits, and if each of the different goods can be
distinguished only by its monetary cost, then certainly the consumer should select
the cheapest one. Conversely, if all goods have the same price, while the benefits
provided by each good can be fully determined by a single quantity (monetary or
other metric), then the good offering the highest-benefit is the best. Clearly, the
choice, in both cases is the “best value for money”.
It may happen that the goods have different costs and different benefits, although
both costs and benefits can be determined through a common metric (monetary or
other). One may then determine, for each good, the ratio of benefits to costs. If all the
goods have acceptable costs (i.e. within budget, not abnormally high), then the good
with the highest benefit-cost ratio is the rational best choice. Even if the benefits and
the costs are measured in different units, this ratio method may still be the appropriate decision function, so long as all benefits are measured in the same units; and
similarly for costs. Here again, the maxim “best value for money”, applies.
Example 7.1 A badminton player is offered a choice between two options for court
time at a neighbourhood club. Option A proposes 100 h for Rs.200, while option
B offers 50 h for Rs.150. Clearly, option A, at ½ h per rupee, gives a higher benefitcost ratio than does option B at 1/3 h per rupee. However, despite option A being
better, the player may have other reasons to prefer option B.
Sometimes, a good can be acquired in variable amounts, for different prices,
entailing a benefit-cost ratio which fluctuates with the amount bought. In such cases,
the best choice for the consumer might be a combination of different goods.
Example 7.2 A community wishes to allocate efficiently its budget for lifeguards
between two beaches, A and B. Table 7.1 shows costs and expected benefits, in lives
saved per season, for various numbers of guards at both beaches. These figures have
been obtained by tabulating the disasters of past years. Table 7.1 also shows the
resultant benefit-cost ratios (BCRs) and the incremental BCRs for each additional
guard. In this situation, where the BCRs change with the cost level, the choice of
goods (i.e., guards at A or guards at B) should be made incrementally, one unit at a
7.2 The Benefit-Cost Viewpoint
187
significant public activities.
7.2 The Benefit-Cost Viewpoint
In the following paragraphs, the word “good” is used to describe any entity preferred
by a company, society, group or individual. Some goods can be obtained for free, or
nearly so. Here, the goods are considered sufficiently expensive (monetary or other
terms) to require the consumer to try to be efficient when buying the goods. When a
rational consumer needs to choose among two or more goods, all satisfactorily
meeting some or all of the same required or preferred objectives, he will try to
choose the “best” one among them. What criteria should he use to do this?
If all goods provide the same benefits, and if each of the different goods can be
distinguished only by its monetary cost, then certainly the consumer should select
the cheapest one. Conversely, if all goods have the same price, while the benefits
provided by each good can be fully determined by a single quantity (monetary or
other metric), then the good offering the highest-benefit is the best. Clearly, the
choice, in both cases is the “best value for money”.
It may happen that the goods have different costs and different benefits, although
both costs and benefits can be determined through a common metric (monetary or
other). One may then determine, for each good, the ratio of benefits to costs. If all the
goods have acceptable costs (i.e. within budget, not abnormally high), then the good
with the highest benefit-cost ratio is the rational best choice. Even if the benefits and
the costs are measured in different units, this ratio method may still be the appropriate decision function, so long as all benefits are measured in the same units; and
similarly for costs. Here again, the maxim “best value for money”, applies.
Example 7.1 A badminton player is offered a choice between two options for court
time at a neighbourhood club. Option A proposes 100 h for Rs.200, while option
B offers 50 h for Rs.150. Clearly, option A, at ½ h per rupee, gives a higher benefitcost ratio than does option B at 1/3 h per rupee. However, despite option A being
better, the player may have other reasons to prefer option B.
Sometimes, a good can be acquired in variable amounts, for different prices,
entailing a benefit-cost ratio which fluctuates with the amount bought. In such cases,
the best choice for the consumer might be a combination of different goods.
Example 7.2 A community wishes to allocate efficiently its budget for lifeguards
between two beaches, A and B. Table 7.1 shows costs and expected benefits, in lives
saved per season, for various numbers of guards at both beaches. These figures have
been obtained by tabulating the disasters of past years. Table 7.1 also shows the
resultant benefit-cost ratios (BCRs) and the incremental BCRs for each additional
guard. In this situation, where the BCRs change with the cost level, the choice of
goods (i.e., guards at A or guards at B) should be made incrementally, one unit at a
7.2 The Benefit-Cost Viewpoint
187