When a government decides to invest in a piece of infrastructure, implement a policy or fund a program, it needs to ensure that the investment or decision will be cost-effective and generate maximum benefit. This is done through a process known as economic assessment.
An assessment of costs and benefits inevitably involves the collection of information on the potential impacts of the proposal, both direct and indirect. Depending on the scope of the project, these impacts can be measured in either monetary terms (which is most common) or in non-monetary terms.
Often the best way to measure these effects is to compile two separate lists: one of all possible costs and another of all expected benefits. Then, you can assign a dollar value to each of these benefits and costs.
Indirect and intangible costs can be difficult to quantify but there are methodologies and software available that make it easier for these to be assigned a value. Examples include opportunity costs, or the loss of productivity or customer satisfaction after a new business process is implemented.
Despite its advantages, cost-benefit analysis can sometimes miss the mark when it comes to assessing the impact of projects and business decisions that involve longer timeframes or more uncertain outcomes. This is because the cost-benefit analysis relies on a number of assumptions about future events, and these can be affected by things like market demand or material prices. Moreover, long-term forecasts may not account for the effect of inflation on future expenditure.