Social Cost-Benefit Analysis

Financial appraisal values cash flows at the market prices a private investor faces and asks whether the project is profitable for its owner. Social cost-benefit analysis replaces market prices with shadow prices that reflect resource opportunity cost to the whole economy, removes pure transfers such as taxes and subsidies, applies distributional weights across income groups, and discounts at a social rather than commercial rate. A project can be financially attractive yet socially unprofitable, or vice versa.

Both rest on the same welfare-economics logic but differ in the numéraire (unit of account). The Little-Mirrlees method values everything in terms of uncommitted government income at world (border) prices, which suits trade-distorted economies. The UNIDO approach of Dasgupta, Sen, and Marglin uses aggregate domestic consumption as the numéraire and is more explicit about consumption distribution. In practice the two yield consistent rankings when applied carefully with corresponding conversion factors.

The social discount rate determines how much weight distant future benefits and costs receive relative to present ones. For long-lived projects — dams, transport networks, climate-relevant investments — even small rate differences compound over decades and can reverse the sign of the net present social value. Because the rate embeds ethical judgments about intergenerational equity and the productivity of capital, analysts typically report results across a range of rates rather than a single point.