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Intro to Cost-Benefit Analysis - YouTube
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hello and welcome to this video series
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on cost-benefit analysis in this first
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video will quickly introduce the
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difference between looking at decision
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making from the perspective of a private
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firm and from the perspective of a
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larger society and hopefully you'll
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start to get a feel for what a
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cost-benefit analysis is meant to do so
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let's say you had $1,000 and he wanted
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to find out if you could make more money
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by mining some sort of mineral deposit
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under a forest how would you make that
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decision well easily enough you could
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find out how much it costs to do find
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out how much money you could earn and
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see which number is bigger so in the
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beginning let's say it takes this much
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money to get started and after a year
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this number represents the labor costs
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the equipment rent just all the costs of
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running a mining operation for a year
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but you'll make this much for selling a
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year's worth of minerals and let's say
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this is a ten year operation each year
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you spend two hundred and forty five
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dollars and you make five hundred
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dollars spend two forty five make five
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hundred spend two forty five make five
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hundred and then after ten years adding
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everything up it looks like you'll come
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away with almost eighteen hundred
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dollars since you started with a
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thousand you made an additional seven
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hundred and ninety five dollars so since
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you would increase your money over that
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ten years you should do it right well
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not necessarily just because you can
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make money at something doesn't mean
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it's the best idea if you picked up some
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little rocks went into town and sold
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those rocks to the kind of people who
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would buy rocks you would probably come
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away with more money than you started
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but maybe you could have spent that time
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doing something more productive and made
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even more money so we need to compare
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this decision this project against
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others the whole point of this
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cost-benefit analysis we've been doing
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has been to decide whether it was a good
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idea or not or what are other options we
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could go with so typically you would
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want to at least compare it to doing
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nothing you know what if you just put
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that money into a bank at let's say 5%
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interests for 10 years if you could make
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more money by investing it like that
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there would be no point in trying to put
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that money into a mining project so
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let's say because of interest your money
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could grow by 5% a year and after 10
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years it would be this much money since
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this is less than the mining project
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it's starting to look like the mining
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project is actually a good idea and you
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should do it this kind of analysis is
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called a financial analysis or financial
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cost-benefit analysis it's what you
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would do if you were a single firm or
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individual trying to maximize your
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profits you would just be looking at the
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money coming in and out of the company
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but
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look at a slightly different situation
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let's say you work for the town and
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there's some sort of mineral deposit
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under a forest nearby that you might be
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able to makes money on you've got a
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thousand dollars to get started what do
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you do well same approaches before
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you're collecting costs and benefits
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trying to find out if you come out ahead
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compared to doing nothing or doing other
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options you're trying to put everything
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into quantifiable dollar values to find
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the best project or best decision just
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like in the previous example you will
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look at whether the mining operation
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itself is going to make money but you
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work for the town
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you're not just concerned with how this
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project affects one firm you're
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concerned with everyone is everyone
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going to be better off so what are some
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of the other things we would need to
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consider well first of all you have to
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decide if not a single firm then whose
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perspective are you considering which
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people involved are paying the costs and
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which people are getting the benefits
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will new jobs in mining reduce
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unemployment saving the town money on
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assistance and policing with the town
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lose access to lumber fuel wood and
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other forest products will noise affect
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the town or surrounding wildlife and you
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would also want to look much more into
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the future especially for mining does
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the forest grow back
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what about tailings ponds the places
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where they put all the toxic on economic
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mining products how long will that be
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there well any of this affect the
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drinking water supply what if there's
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some rare bird within the forest that
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would definitely go extinct of mining
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took place are there any other
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alternatives other than mining for using
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the same land maybe instead of starting
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a mining operation they could turn the
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forest into some sort of maintained
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Conservation Park that can attract
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tourists and how big is the analysis
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going to be or how many people's the
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analysis going to include is there
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another town that's close enough that
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you might want to look at that different
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decisions and different projects might
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affect the entire world for example if
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you're going to start including things
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like global warming this type of
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analysis is called an economic
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cost-benefit analysis or social analysis
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where a financial analysis deals with
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how decisions affect a single firm an
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economic analysis looks at the larger
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economy you look at all the people the
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project will affect to see if it's a
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sensible decision who's going to be
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included in the study which different
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alternative decisions are going to look
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at which scenarios are going to consider
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and how far into the future you're going
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to look or all things you'll define
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before you start a cost-benefit analysis
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this series on cost-benefit analysis
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process will take you through how to
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make these decisions what to look at
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what pieces to put together and how to
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analyze different projects
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