Impact Methodologies

Cost-Benefit

Overview

Cost-benefit analysis is a framework for considering a range of benefits and costs in monetary terms. A variety of analytical tools are available to assist in quantifying and monetizing the various benefits and impacts of transportation and land development policies. Since some impacts are difficult to monetize, the results of cost-benefit analysis are rarely the sole factor in determining whether a project or policy is worthwhile. Cost-benefit analysis can nevertheless serve as a useful tool in alternatives evaluation. It can be used to assess overall benefits, to compare the relative magnitude of specific costs and benefits, and to assist in prioritizing among alternatives.

In benefit-cost analysis, a stream of benefits and costs over a period of time is typically discounted to place it in current year terms. In this way, the value of benefits and costs that occur continuously can be directly compared to one-time costs such as highway construction costs. Common benefit-cost measures include benefit-cost ratio, net present value (NPV), and internal rate of return (IRR).

Cost-effectiveness analysis is related to cost-benefit analysis. Instead of attempting to enumerate all benefits in monetary terms, however, cost-effectiveness analysis focuses on one or more specific impacts, such as total emissions. A comparison is then made of the cost per unit reduction in the impact, e.g., cost per ton of pollution reduced. Cost-effectiveness analysis is most useful when one or a few impacts that are not easily monetizable are of primary interest.

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