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File:Incorporating Risk and Uncertainty in Cost-Benefit Analysis.pdf (view source)
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== Summary ==
== Summary ==
== Sener Salci ==
Queen's University - Department of Economics
== Glenn P. Jenkins ==
Queen's University - Department of Economics; Eastern Mediterranean University
Date Written: September 10, 2016
Abstract
Abstract
Cost-Benefit Analysis (CBA) is a tool for assessing the welfare effects of changes in regulatory and investment interventions. While in many ways an effective approach, a significant drawback of CBA, however, is that it relies on estimates for variables that cannot be predicted with complete accuracy. As such, expected outcomes generated by CBA, such as financial and economic net present values (NPVs), incorporate a degree of risk and uncertainty. It is therefore critical that CBA is based on transparent assumptions about the nature of risk and uncertainty affecting key variables: CBA cannot contribute to rational decision-making unless the distribution of outcomes is clear, and the effect on forecast reliability understood.
Cost-Benefit Analysis (CBA) is a tool for assessing the welfare effects of changes in regulatory and investment interventions. While in many ways an effective approach, a significant drawback of CBA, however, is that it relies on estimates for variables that cannot be predicted with complete accuracy. As such, expected outcomes generated by CBA, such as financial and economic net present values (NPVs), incorporate a degree of risk and uncertainty. It is therefore critical that CBA is based on transparent assumptions about the nature of risk and uncertainty affecting key variables: CBA cannot contribute to rational decision-making unless the distribution of outcomes is clear, and the effect on forecast reliability understood.