Cost-benefit analysis

Abstract

Cost-benefit analysis is probably the most comprehensive method of economic evaluation available and it can be applied in two ways. The human capital approach means that the value of people's contributions is linked to what they are paid. The approach based on individuals' observed or stated preference means that their personal valuations are placed on an activity by assessing how much money they are prepared to accept for an increased risk or to bay for a particular service. Each method has its disadvantages and the most successful that has been devised so far is the 'willingness to pay' (stated preference) approach, though the response to this is to a large extent dependent on the income of the person being questioned. There are still problems with its application, however, so its usefulness is limited.