What is the difference between private and social cost-benefit? Which one of the two is more relevant to government investment decision and why?

Private Cost-Benefit Analysis

Private cost-benefit analysis evaluates the costs and benefits from the perspective of a single economic agent – an individual or a firm. It considers only the direct, internal costs and benefits associated with a decision. For example, a firm deciding whether to invest in a new factory will consider the cost of land, labor, capital, and the expected revenue from sales. Similarly, an individual deciding whether to pursue higher education will weigh the tuition fees, foregone income, and the expected increase in future earnings.

Social Cost-Benefit Analysis

Social cost-benefit analysis, on the other hand, takes a broader perspective, encompassing all costs and benefits to society as a whole. It includes not only the private costs and benefits but also the external costs (negative externalities) and external benefits (positive externalities).

• External Costs: These are costs borne by third parties who are not involved in the economic activity. Examples include pollution from a factory affecting public health, traffic congestion caused by increased commuting, or noise pollution from an airport.
• External Benefits: These are benefits enjoyed by third parties. Examples include vaccinations reducing the spread of disease, education increasing civic engagement, or a beautiful garden enhancing property values in a neighborhood.

Comparing Private and Social Cost-Benefit

The key difference lies in the inclusion of externalities. Private CBA focuses on market prices, while social CBA attempts to quantify the value of non-market impacts. This often requires techniques like contingent valuation, hedonic pricing, and travel cost methods to estimate the monetary value of externalities.

Feature	Private Cost-Benefit Analysis	Social Cost-Benefit Analysis
Perspective	Individual/Firm	Society as a whole
Costs Considered	Direct, internal costs	Direct + External Costs
Benefits Considered	Direct, internal benefits	Direct + External Benefits
Externalities	Ignored	Included
Market Prices	Relies heavily on market prices	Adjusts market prices to reflect social values

Relevance to Government Investment Decisions

Social cost-benefit analysis is significantly more relevant to government investment decisions for several reasons:

• Welfare Maximization: Governments are entrusted with maximizing societal welfare, not just private profits. Social CBA provides a framework for evaluating projects based on their overall impact on society.
• Internalizing Externalities: Governments can use policies like taxes, subsidies, and regulations to internalize externalities. For example, a carbon tax can make polluting firms bear the social cost of their emissions, leading to more efficient resource allocation.
• Public Goods: Many government investments involve public goods (e.g., national defense, infrastructure) that generate positive externalities and are under-provided by the market. Social CBA helps justify these investments.
• Addressing Market Failures: Social CBA helps identify and address market failures, such as information asymmetry and public goods provision, leading to more efficient and equitable outcomes.

Example: Consider a proposed highway project. A private CBA might only consider the construction costs and the toll revenue. A social CBA would also account for the reduced travel time for commuters (a benefit), the noise pollution affecting nearby residents (a cost), the air pollution impacting public health (a cost), and the potential displacement of communities (a cost). The government should base its decision on the social CBA, even if it means foregoing a project that appears profitable under a private CBA.

The National Infrastructure Pipeline (NIP) launched in 2019, emphasizes the need for comprehensive project appraisal, implicitly advocating for a social CBA approach to ensure sustainable and inclusive infrastructure development.