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Market Failure and Government Intervention

studies which are widely used by industry.  The theory and application of capital budgeting are presented in chapter 14.

F.  Maximizing Net Benefits:

Cost Benefit Analysis

Government agencies are responsible for taking a wider view of the benefits and costs of economic activity than are firms and other agents in the private sector.  If you work for the government you need to consider to whom both benefits and costs accrue and then make sure that the benefits outweigh the costs  before you recommend a policy.  Cost-benefit analysis is the economic tool with which you can measure the benefits and costs which result from a given policy initiative.  Because cost-benefit analysis requires the discounting of future benefits and costs, it is the public sector counterpart to the capital budgeting used in the private sector.

However, private organizations may also use cost-benefit analysis.  If you work for a non-profit firm there will be no profits to discount for capital budgeting and you must determine costs and benefits just as the government would.  Even in a private firm- particularly one that has contracts with government agencies- you will find cost-benefit useful, because managers must often weigh the effects of policy choices on more than just the stockholders of a firm.However, sometimes cost-benefit analysis in an organization is only about the costs and benefits that involve stockholders in which case the study is really an analysis of income or a profit and loss statement, not a true cost-benefit analysis  If you are in a public relations department, legal department, planning department, or trade association, you may have occasion to comment on or criticize cost-benefit studies done by government agencies that are designing policies that will affect your organization as well as many other stakeholders in our economy.  

Table 17-2  Studies Used in Organizations

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