Imagine a city that is considering the development of a new major park. It’s common for policymakers to use a cost-benefit analysis to weigh the pros and cons of such a decision. The city’s goal would be to tally up all the costs of this decision and subtract that amount from the total projected benefits of their decision. If the city found that the projected benefits of constructing the park outweigh the costs, the policymakers would likely argue that the decision is a good one to make. 

Let’s unpack the steps of performing a cost-benefit analysis and how this would apply to the example of the park development. 

1. Establish a Framework for Your Analysis

First, decision-makers need to identify the main goals of the initiative. This includes defining the scope and time frame of the analysis, the stakeholders involved, and the criteria for success. They must also decide which metric will be used to measure and compare the costs and benefits. To accurately compare the two, both should be measured in the same “common currency.” Although this doesn’t necessarily require setting a dollar amount for each cost or benefit, it’s common practice to assign monetary values whenever possible. 

In the case of the park, the city officials would need to identify the city’s main goals with this initiative. What would they need to accomplish to consider the park a success? They would need to identify (and agree on) their scope, timeline, and metrics for success (and failure!).

2. Identify Your Costs and Benefits

The next step would be to compile an explicit list of all the expected costs and benefits. This list is central to making a decision as it defines the variables being compared. There are several types of costs and benefits that can be considered, some more obvious than others.

Let’s begin with costs:¹

• Direct Costs: These are the costs that first come to mind, as they’re directly related to the end goal and are easily quantified. In terms of the park example, these would be the costs of acquiring the land to be used for the park, the construction costs (e.g., landscaping, infrastructure, pathways), and the ongoing maintenance of the park (e.g., staffing, equipment, utilities).
• Indirect costs: These are fixed or variable expenses that, while not directly related to the end goal, are still relevant to the final product or project. Indirect costs in the construction of the park might include traffic congestion during construction, the opportunity cost of using the land for other purposes, and increased demand for public services (e.g., security and sanitation).
• Intangible costs: Intangible costs are very difficult to measure but still crucial to consider, and include costs relevant in the present day and in the future. In the case of building a park, this could be things like noise and disruption during construction or possible displacement of current residents and businesses.
• Competitive costs: These are costs that affect an entity’s ability to compete in the marketplace or factors that may cause other entities to lose market share. Competitive costs associated with developing a new park might include the potential loss of commercial development opportunities (e.g., retail or housing projects).

Once all of the costs are defined, the corresponding types of potential benefits should be considered. In the example of a park…¹

• Direct benefits might include improved public health through the new recreational space and increased property values in surrounding areas. 
• Indirect benefits would include enhanced tourism and local business revenue (if the park is a nice one!), increased social cohesion through the introduction of additional community gathering space, as well as long-term savings from environmental sustainability, reduced flood risk, and improved air quality. 
• There are also many intangible benefits, including the beauty of nature, the joy of playgrounds and field spaces, and improved public health and quality of life. 
• Lastly, the competitive benefits would be the increased attractiveness of the city for future residents and businesses and an advantage over nearby cities with fewer green spaces.

Making sure that each cost and benefit list is as comprehensive as possible is crucial to ensure the calculation is accurate. If just a few minor benefits are overlooked, the calculation could tip toward avoiding a potentially beneficial choice.   

3. Assign a Dollar Amount or Value to Each Cost and Benefit

The next part is notoriously difficult: quantifying the value of each cost and benefit identified. For our park example, giving a dollar amount to something like “fresh air,” “beauty of the autumn leaves,” or “the sound of children playing” feels like almost an impossible task to complete. Indirect and intangible costs and benefits cannot be objectively quantified and thus will always be the center of debate. But, that doesn't mean we shouldn’t try. There are now countless software, social platforms, and tools available to help us assign values to some of these less obvious factors. Although we may never reach a perfect calculation, an attempt at a rough estimate can be more helpful than simply giving up on any potential change that involves intangible costs (spoiler alert: that’s almost everything in life). 

To conduct these imperfect analyses, someone might use a technique like shadow pricing to estimate the value of intangible goods, or attempt to calculate an individual's willingness to pay (WTP) for a specific good. Whatever method is used to quantify the costs and benefits, especially for non-monetary goods, the process should be transparent. This helps keep decision-makers accountable for their choices and consistent across evaluations. 

4. Tally the Total Value of Benefits and Costs and Compare

Once every cost and benefit has a dollar amount next to it (even if it’s just an estimate), the decision-makers can properly tally up each list and compare the two. If total benefits outnumber total costs, then they should move forward with the proposal. If the costs outweigh the benefits, perhaps there are alternatives to the proposal they haven’t considered. In the case of the park, perhaps some of the same goals could be achieved with a reduction in the costs. There might be the option to plant more trees along the road, install swing sets in preexisting greenspaces, change the proposed location of the park, or some other potential option that could help city planners meet some of their original goals. 

There is also the question of what value we give to future consequences. Traditional cost-benefit analysis attempts to put all costs and benefits on an even temporal level and a discount rate is chosen, which is then used to compute all relevant future costs and benefits in present-value terms. Most commonly, the discount rate used for present-value calculations is an interest rate taken from financial markets.² In reality, we often fail to give adequate value to future potential impacts. In the case of the park, the immediate monetary costs of installing a playground are conspicuous, but the health and happiness of future generations of children may be less apparent. If there are pollution concerns regarding the construction of the park, how might these compare to the potential health benefits to people for decades to come, stemming from cleaner air and increased access to nature?

By conducting cost-benefit analyses, decision-makers can parse out not only whether or not they should move forward with certain projects, but they can also predict a policy change’s ROI, identify any major expected barriers, and jumpstart conversations about potential roadblocks or ethical considerations. Although the basic principles and framework are most often applied in business and policy situations, they can be applied to virtually any decision-making process. In fact, cost-benefit analyses have been used in everything from planning electric vehicle charging infrastructure (which you can read about in our “case study” section) to proposals for telemedicine implementation in rural areas.

Net Present Value (NPV): The difference between the present value of benefits and costs over a project’s lifetime, discounted to account for time.³

Discount Rate: The interest rate used to convert future costs and benefits into present value, reflecting time preference and opportunity cost.

Opportunity Cost: The value of the next best alternative foregone when a particular decision is made.

Indirect Costs: These are typically fixed expenses, such as utilities and rent, that contribute to the overhead of conducting business.

Intangible Costs: These are any current and future costs that are difficult to measure and quantify, such as decreases in productivity levels while a new business process is rolled out, or reduced customer satisfaction after a change in customer service processes that leads to fewer repeat buys.⁴

Willingness to Pay (WTP): The maximum amount an individual is willing to spend to obtain a benefit or avoid a cost.⁴

Marginal Cost: The additional cost incurred by producing or providing one more unit of a good or service.

Benefit-Cost Ratio (BCR): The ratio of total benefits to total costs, used to evaluate the desirability of a project.⁴

Sensitivity Analysis: A method of testing how changes in key assumptions impact the results of the cost-benefit analysis, enhancing the robustness of conclusions.

Shadow Pricing: Estimating the monetary value of intangible or non-market goods (such as environmental impacts or education) for inclusion in cost-benefit analysis.

Common Currency: A standard unit of measurement used to quantify and compare the costs and benefits of different options or projects. By expressing diverse factors (like environmental impacts, social benefits, or economic costs) in a common monetary unit or other comparable metric, analysts can objectively assess trade-offs and determine the most cost-effective or beneficial course of action.

Cost-Effectiveness Analysis (CEA): This measures outcomes in non-monetary units (e.g., lives saved) to determine the most efficient way to achieve specific goals, often used in healthcare or environmental contexts. This differs from CBA, which assigns monetary values to both costs and benefits to assess whether the benefits outweigh the costs of a project. CBA focuses on overall economic value, while CEA focuses on achieving a specific outcome at the lowest cost.⁴

The first documented use of a cost-benefit analysis, specifically in public policy choices, began in the 19th century in France. There, cost-benefit analyses were applied to early infrastructure projects like road and bridge construction. The method was informally used to evaluate public investments, ensuring resources were allocated efficiently.⁵

In the 1840s, French engineer and economist Jules Dupuit formalized CBA, focusing on the evaluation of social benefits of public goods (things like roads, parks, and bridges). In order to quantify the value of certain infrastructure projects that many people were using, he started by comparing the costs of construction with the benefits (or ‘utility’) for the public.⁵

The U.S. more formally adopted CBA in the 1930s. With France as the leading example of CBA for public goods, the U.S. began to use this method primarily to evaluate potential large-scale water resource projects. Engineers and economists collaborated to determine the economic feasibility of projects like dams, considering both financial costs and public benefits. In 1936, the Flood Control Act was passed, a piece of legislation that mandated that for any federal water projects, benefits must exceed costs. Although this may seem like an obvious decree, this legislation solidified cost-benefit analysis as an important tool for public policy decisions.⁵

Post-WWII, cost-benefit analyses were further refined, especially in defense projects. The U.S. military applied this method extensively to assess the value of research, development, and procurement, which fueled its application in broader public sector decision-making. Both France and the U.S. applied CBA to public goods and infrastructure investments, but with differing priorities—France focused more on social welfare, where decisions were made not just based on efficiency but also on broader social outcomes and potential public good which may have been less quantifiable. Meanwhile, the U.S. emphasized economic efficiency, taking on a more utilitarian approach. They used CBA primarily to drive economic growth and efficiency, calculating net benefits, and only taking on projects which maximized economic returns.⁵

Today, the modern form of CBA blends engineering’s practicality with economic theory. The method is structured with the principles of economic analysis, integrating concepts like opportunity cost and utility theory to assess public investments rigorously. Cost-benefit analyses are integral to policymaking, particularly in environmental regulations and social programs—two fields in which it can be difficult to quantify utility. Governments and international institutions use cost-benefit analysis to weigh the long-term impacts of projects, balancing economic, environmental, and social factors in decisions.

Although the first official known use of CBA didn’t appear until the 19th century, we can safely assume that people have always weighed the positives and negatives of taking certain actions before doing them. Our brains are naturally wired to take notice of potential risks and rewards that may come from the choices we make; in some ways, it’s like we are doing tons of simplified, instantaneous cost-benefit analyses as we go about our day. Our prefrontal cortex, which is responsible for the bulk of decision-making, reasoning, and a number of other higher-level functions, naturally incorporates information from the surrounding environment into key decisions.¹⁰

But since the prefrontal cortex doesn’t fully develop until around age 25, many children and young adults are prone to making impulsive, less ‘rational,’ and potentially more emotion-oriented decisions.¹¹ Their choices can sometimes lack the forethought that comes easier to older adult brains, as young adult brains are often wired more towards instant gratification, leading them to discount or even ignore the future effects of their choices. If we were to conduct a more structured cost-benefit analysis, future outcomes would be a part of the calculation as well.

However, this doesn’t mean that there is zero cost-benefit analysis taking place. For example, even a teenager with a sweet tooth is unlikely to try walking across a four-lane highway just for a piece of candy. Their brains can probably easily calculate that the risks of getting hit by a car are far greater than the reward for some candy. But that same teenager may be willing to pay an incredibly high price for sweets at the movie theater or airport since their drive for instant gratification (and sugar) might outweigh the costs of spending excess money and risking cavities. It’s worth stressing that everyone’s personal CBA is different, and not only our age but culture, personality, experience, and environment can all shape our internal calculations. 

The main advantage of a successful cost-benefit analysis is that it helps clarify which projects deliver the greatest net benefit. By translating what were once considered intangible costs such as health outcomes, environmental damage, and other externalities into monetary values, CBAs provide a more holistic assessment than financial metrics alone, granting it the potential to lead to more balanced and equitable decisions.

The flexibility of a cost-benefit analysis model means that non-market values can be incorporated into calculations. In cases where direct monetary benefits are hard to measure, (like in public health, environmental conservation, or animal lives saved), CBAs allow for the inclusion of qualitative benefits by assigning them a monetary equivalent, even if the value assigned is imperfect. For example, improving air quality or preserving biodiversity might not generate immediate revenue but it does provide long-term societal value. Even if we can never put an exact price on the value of clean air, the ability to translate non-monetary benefits into theoretical economic terms allows us to better justify investments in sustainability and public well-being.

Moreover, a cost-benefit analysis aids in transparency and accountability, which is incredibly important for stakeholders when hugely impactful decisions are being made. The CBA process is one tool that allows us to analyze the data we collect and make decisions based on research. By making explicit the assumptions, costs, and benefits considered in any given project, CBA ensures that stakeholders—including governments, businesses, and the public—can critically evaluate the merits of a decision. This transparency is particularly important in large-scale projects like infrastructure development (like bridges and roads) or social programs (like free school lunch), where public funding is at stake and outcomes affect multiple sectors of society.

Now, if we were to conduct a cost-benefit analysis of the use of cost-benefit analyses, we would have to identify some of the potential costs of this method, right?

As discussed, a major challenge with cost-benefit analyses is that they require quantifying all the variables involved. This can be not only challenging but also ethically questionable or even impossible. For example, how does one define the value of a human life? Are some lives worth more than others? Should someone’s demographics be considered as factors in their calculated ‘value’? A major pitfall of CBA is the potential to subjectively place more value on some human lives over others in a way that seems objective. Similar to the ethical issues with GDP, the value of an uneducated person living in poverty from a country with low GDP could be deemed ‘less valuable’ compared to someone with an advanced degree and the economic and professional resources to generate life-saving cures for diseases. 

These types of questions may seem not only unanswerable but problematic to even pose—and yet, in order to conduct a cost-benefit analysis, one must attempt to provide values for every possible cost or benefit. One major point of contention which often arises is the question of who is in charge of these calculations. To no surprise, usually the decision-makers are those who already hold power. For example, many C-suite teams regularly conduct CBAs when making major company decisions. But without the direct input of lower-level staff, their analyses may unfairly weigh the perspectives of higher-ups. In a retail organization, for instance, C-suite members might undervalue the impact of changes to store layouts, while the floor workers would know (and have to experience firsthand) the major frictions of changing the physical store space. More broadly, it’s usually those from western countries who end up making decisions that greatly (and often negatively) impact those from non-western countries. Their calculations of costs and benefits, like everyone’s, carry bias and imperfect judgment.⁶ 

The traditional economic argument suggests that if safety were truly valued, workers would demand higher wages for riskier jobs.² However, concerns about relative income might distort this relationship because if workers are more focused on earning more than their peers, they might accept riskier jobs even if the wage premium doesn't fully compensate for the danger. This implies that a cost-benefit analysis solely based on wage differentials might underestimate the true value workers place on safety and could be used to justify inadequate safety regulations, potentially leading to an unjust outcome.

In the first example we looked at, a group of city planners were debating the construction of a new park. But what if the same city were considering a more complex and ethically ambiguous choice? Consider a city that is proposing a ban on factory farming to promote animal welfare. To do a cost-benefit analysis, it would be challenging to definitively calculate just how much food prices would potentially rise after a factory farm ban, given that there are so many unknowns. How might oil prices change in the future? How will inflation simultaneously change food prices? Will decreasing access to clean water continue to shift prices for all grocery products? However, we can make reasonable predictions for how much variables like prices may change. It’s then up to the decision-makers to, along with all other stakeholders, use some of the tools we’ve defined to decide how to fairly value the intangible and indirect costs. 

Ultimately, it is people who define the list of variables and it’s people who assign value to those variables. How each cost or benefit is identified and quantified is subject to the perspective of the people conducting the analysis. The process is largely imperfect, many variables can be hard to predict, and incorrect data can skew the results of the analysis, ultimately leading to a faulty conclusion.

U.S. Clean Air Act

In the 1960s, the U.S. Clean Air Act was passed, which was a federal law designed to protect public health and the environment by regulating air emissions from things like industrial power plants and personal vehicles, ultimately reducing harmful pollutants. Cost-benefit analysis was a crucial method for the Clean Air Act’s implementation and amendments. The Environmental Protection Agency (EPA) conducted detailed CBAs to assess the Act's impacts, with a primary focus on balancing the industrial costs of reducing air pollution—such as from power plants, manufacturing, and transportation—against the significant public health benefits. These health benefits included things like reduced respiratory diseases, fewer hospitalizations, and increased life expectancy. Ultimately, these potential health benefits were momentous; better health outcomes mean lower healthcare costs, higher worker productivity, fewer sick days, and, of course, the intangible value of a healthy life. 

Although industries faced substantial costs for adopting cleaner technologies and reducing emissions, the EPA's analyses indicated that the long-term economic benefits from improved public health and reduced environmental damage far exceeded the short-term costs borne by industries. The Act also factored in job losses in certain (more polluting) sectors but justified these against gains in sectors like renewable energy and healthcare. This approach helped secure widespread acceptance of the Clean Air Act, demonstrating its net positive effect on both the economy and society, and enhancing environmental standards by reducing pollutants like sulfur dioxide and nitrogen oxides.⁷

London Congestion Charge

Let’s look back at another example of a cost-benefit analysis being applied to clean air regulation: the introduction of the London Congestion Charge. This method was used to assess the introduction of a potential charge to reduce traffic and pollution within the city. Officials investigated the impact of traffic on home prices, which was the largest monetary benefit in question. Potential benefits from reduced traffic also included safer roads and cleaner air: harder to quantify, but incredibly important. 

Researchers used an estimation based on a difference-in-difference instrumental variable (IV) estimation approach for home sales around the proposed charge boundary. This helped them calculate exactly how home prices would change with the introduction of a traffic tax. Overall, their analysis showed long-term benefits in terms of reduced congestion, better air quality, and increased public transport use. These benefits outweighed the costs of implementation, equity concerns, and the possible impact on businesses.⁸

In 2003, the London congestion charge was introduced for most cars and motor vehicles being driven within the Congestion Charge Zone in Central London between 7:00 am and 6:00 pm Monday to Friday, and between 12:00 noon and 6:00 pm Saturday and Sunday. Since then, there have been numerous updates to the program, including exemptions for electric vehicles (which have since been removed, and now all vehicles are charged) and additional taxes for vehicles with high emissions. 

If you’ve ever been to London, you know that traffic can be incredibly slow. Even if it’s a straight shot down the road, it’s often faster to walk, bike, or take the Tube to avoid the street traffic. However, researchers estimate that the congestion charging scheme facilitated a 10% reduction in traffic volumes from baseline conditions, and an overall reduction of 11% in vehicle-driven distance in London between 2000 and 2012.⁹ The city has continued to implement programs to improve pedestrian well-being, increase public transport options, and encourage eco-friendly modes of transport, all of which have helped reduce traffic. So, although there is still an ever-presence of London traffic, the conditions are likely better than they would’ve been without the tax and slow progress is better than none at all.

Does the Quantified-Self Lead to Behavior Change?

Our obsession with quantifying the self—or trying to give objective data scores, rankings, and categories to everything around us—can lead to not only anxiety or an obsession over the numbers around us, but also to a warped sense of reality. When too much emphasis is placed on the “quantifiable” aspects of life or certain experiences, we may ‘lose the forest through the trees,’ either overemphasizing only what we can quantify or overestimating our ability to accurately quantify subjective things. However, if we can learn how to navigate and refine the large amounts of data offered by modern technology, then we can make progress on some of our own challenges. This article explores how behavioral science can untangle the complex relationship between technology and long-lasting behavior change.

Sunk Cost Fallacy

Cost-benefit analyses are one tool we can use to help focus our decision-making into a more data-driven perspective and prevent irrational or self-sabotaging choices. While CBAs usually take place before a decision is made, life doesn’t stop after regulation is passed; there are still many choices to make, and sometimes unforeseen circumstances can require a change in behavior. This article unpacks the sunk cost fallacy: our tendency to follow through with something that we’ve already invested heavily in (be it time, money, effort, or the emotional energy spent on a lengthy cost-benefit analysis), even when giving up is clearly a better idea.

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