Cost Benefit Analysis for New Airport

November 19th, 2007 | markets -

Discuss the difficulties of using Cost Benefit Analysis in deciding whether to build a new international airport. (30)

A Cost Benefit analysis involves examining whether society will benefit from building a new airport. Therefore, the government need to calculate all the social costs and social benefits. This includes calculating private costs and external costs, as well as private benefits and external benefits.

Difficulties include

1. Placing a monetary value on external costs and external benefits.

For example, an external cost of a new airport is increased pollution from more flights. However, the exact cost is difficult to measure because we are uncertain about the implications of global warming. The new airport may also involve building on greenbelt land. This means that local wildlife will suffer. The importance of local wildlife and the environment is very subjective. e.g. if you asked a questionnaire would give very different answers.

2. Impact on future generations.

Building an airport will impact on future generations. There will be future benefits – higher economic growth. But, also future costs. The environmental cost may be higher in the future than they are now. The government need to try and take this into account.

3. Pareto Improvement?

Social benefit may be greater than total social cost. However, a small number of people may be severely inconvenienced (e.g. those living under the new flight paths). Therefore, although society may be better off some people aren’t. Therefore, it may increase inequality. One solution may be to compensate those living nearby through profits from the airport.

4. Poor information

It can be difficult to predict the financial costs and benefits. e.g some projects can take a long time to build. Initial estimates are often wrong. (e.g. cost of Wembley stadium, cost of millennium dome)

However, there are not many alternatives to cost benefit analysis. At least they provide a framework for making decisions.