The paper "What Is Benefit-Cost Analysis" is a great example of an assignment on macro and microeconomics. Measures of benefits include things such as increased income, reduced illness, increased access to water, reduced cost of transportation, and so forth. Measures of costs include costs of all resources that are used such as equipment, personnel, and facilities that are utilized in the planning and implementation of an intervention. These measures are regarded to be conceptually correct because they can be calculated by comparing measurements before and after an intervention as projected in the benefit-cost analysis. b) Describe why it is often difficult to use these measures in practice. It is often difficult to use these measures in practice because of methodological problems.
For instance, measuring the health benefits of reduced emissions may not be possible if data on the situation that existed before an intervention is not available. Similarly, measuring the costs of emissions may be a complex process because of the diverse nature of parties that are affected by emissions. As well, the valuation of future costs and benefits through discounting can be a tricky affair because of the uncertainties that surround future costs and benefits.
More importantly, it is difficult to use the aforementioned measures because the values have to be converted into a monetary value in order to be used in benefit-cost analysis. Question 2Why are future benefits and costs converted into present values in the benefit-cost analysis? Answer this question by carefully explaining the economic basis for discounting the future. Future benefits and costs converted into present values in benefit-cost analysis in order to make it possible to calculate and analyze benefits and costs for a particular number of years into the future.
Discounting future values in the benefit-cost analysis is done because of two fundamental reasons. The first reason is time preference and the second reason is the social opportunity cost of capital.