The benefit-cost approach first surfaced in France during 1844. In this century, benefit-cost analysis has been widely used in the evaluation of river and harbor projects since as early as 1902. In the United States, the 1936 Flood Control Act authorized federal assistance in developing flood-control programs “if the benefits to whomsoever they may accrue are in excess of the estimated costs.” By 1950, federal agency practice required the consideration of both direct and indirect benefits and costs and that unmeasured intangible influences be listed. Despite this long history of widespread use, it has only been since 1970 that public-sector managers have sought to broadly apply the principles of benefit-cost analysis to the evaluation of agricultural programs, rapid transit projects, highway construction, urban renewal projects, recreation facility construction, job training programs, healthcare reform, education, research and development projects, and defense policies.
A. Briefly describe major similarities and differences between public-sector benefit-cost analysis and the private-sector capital budgeting process.
B. What major questions must be answered before meaningful benefit-cost analysis is possible?
C. Although the maximization of society’s wealth is the primary objective of benefit-cost analysis, it is important to recognize that constraints often limit government’s ability to achieve certain objectives. Enumerate some of the common economic, political, and social constraints faced in public-sector benefit-cost analysis.
D. In light of these constraints, discuss some of the pluses and minuses associated with the use of benefit-cost analysis as the foundation for a general approach to the allocation of government-entrusted resources.