Thursday, 17 February 2022

The concept of obvious and implicit benefits and costs

Quite often, analysts include costs that reduce the ability to achieve project goals, and benefits include what contributes to their achievement. However, such a simplified approach leads to the emergence of a problem of defining goals for each project participant. 


For private companies or public corporations, the main goal is to maximize profits, but at the same time they have other important goals. For example, they may be interested in diversifying their activities, which will reduce their own risk. For society as a whole, the main goal is to increase public welfare, but it also cares about the distribution of income, increasing the number of jobs to reduce the unemployment rate, strengthening regional integration or ensuring national security.

For most countries, raising income is the most important task of any initiative in the economic sector, and increasing national income is the goal of national economic policy. Thus, in this system of economic analysis, anything that reduces national income is considered a cost, and anything that increases it is a benefit.

In the project analysis, there are obvious and implicit benefits and costs.

Obvious are the material benefits (costs due to a decrease (increase) in costs or the receipt of additional income (expenses), the value of which is usually obvious, which makes it quite easy to determine their financial value.

Implicit benefits (costs) include the side benefits (costs) that accompany the project. They are usually associated with the economic or social consequences of the project and are indirect in nature. Implicit benefits (costs) are necessarily reflected in the economic assessment of the project, when its attractiveness is assessed from the standpoint of society as a whole. To assess the benefits and costs from the point of view of economic analysis, it is desirable to use an alternative cost of resources and products.

The methodology for assessing implicit benefits and costs involves the use of the following techniques:

determining the prices of goods and services of related markets, in which these implicit benefits and costs have a quantitative dimension. For example, to assess the inconvenience caused by noise and pollution of the motorway, you can use prices in the housing market;

indirect evaluation, or valuation of the prices of hypothetical market goods, consisting in the survey of people affected by the project, whether they would be willing to pay (for profit or eliminate costs) or to receive compensation (for refusal of benefits or for costs) if there was a market for these implicit benefits or costs;

the maximum — the minimum value — the determination of the quantitative value of implicit costs, which the benefits should exaggerate. For example, you can estimate the cost of cleaning contaminated waters and then decide whether the benefits will exceed that amount of costs.

Implicit benefits and costs often accompany projects with external effects. Such side costs are estimated either: 1) the minimum compensation they would require in order to restore the previous level of well-being without this external effect; 2) for the maximum amount that they are willing to pay to stop this external effect. The choice of this approach depends on whether the company has the right to pollute the water altogether or to a certain level, whether the inhabitants have the absolute right to use completely uncontaminated water, as well as whether there is a regulatory framework for compensating the population for losses.

No comments:

Post a Comment