Coastal Services Center

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Cost-Benefit Analysis

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What Is Cost-Benefit Analysis?

Cost-benefit analysis is a tool for comparing the benefits of proposed projects with the costs to help users identify the alternative with the maximum net benefit (benefits minus costs). The more the benefits exceed the costs, the more society will benefit from the project activity or policy decision.

There are four basic steps to performing a cost-benefit analysis:

• Identify the project or program and alternatives
• Describe quantitatively the inputs and outputs of each alternative
• Estimate the value of the costs and benefits
• Compare benefits and costs

MPA Application

Cost-benefit analysis, when done correctly, can give a manager a better understanding of the impact of the marine protected area on stakeholders, in terms of costs and benefits. This knowledge can help a manager identify alternatives that are the most beneficial, comparing projects that differ in magnitude and duration.

Cost-benefit analysis requires the conversion of all benefits and costs into common units—typically dollars. Because many environmental outputs cannot be easily measured in monetary terms, it may be possible to apply this tool in only a limited range of project decisions. Where it can be applied, however, cost-benefit analysis is an important tool for helping managers do the most environmental good with limited time, funding, and other resources at their disposal.

Expertise Needed

This technique often requires some assistance from skilled experts or the use of specialized software that can analyze text for underlying meanings.

Advantages

• Compares costs and benefits using equal terms
• Provides a clear indication of net cost or benefit of the MPA or a specific regulation. This helps justify decisions at various levels
• Simplifies complex concepts and processes
• Accepted by society more readily than other economic methods
• Can be carried out at many levels (i.e., local, regional, national, international)

Limitations

• Can be difficult to determine accurately the discount rate of future costs and benefits as well as indirect impacts
• Needs to be used with nonmarket valuation methods to be accurate
• Costs are easier to estimate than benefits
• Can be a time-consuming and expensive process
• Does not always consider the source of the costs and benefits – needs to consider factors such as environmental justice and indirect impacts

Case Studies

Additional Resources

Cost-Benefit Analysis
Developed by the National Center for Environmental Decision-Making Research, this interactive research module provides in-depth information on many aspects of cost-benefit analysis and is geared towards the environmental decision-making process.

Marine Protected Areas: Economic and Social Implications (PDF format)
A guide to better understanding of the economic and social values of MPAs. Discussions of benefits and costs as well as economic and social tradeoffs are included.

Overview of Benefit Cost Analysis
Cost-benefit analysis is described and discussed in detail. Alternative methods including cost-effectiveness analysis and incremental analysis are described and examples of each are provided.

Generational Cost Benefit Analysis for Evaluating Marine Ecosystem Restoration
This guide from Colorado State University includes an overview of cost-benefit analysis, including types, history, and uses. Issues of reliability and variability as well as advantages and disadvantages are also discussed.

For general economic resources see Economics.