Cost-benefit analysis (CBA)

Cost-benefit analysis is a method for weighing all the expected costs and benefits of a policy, program, or infrastructure project against each other, after converting them into a common monetary unit, to judge whether the benefits justify the cost.

The core calculation discounts future costs and benefits to a present value, roughly NPV = sum of (benefits − costs) / (1 + r)^t across each future year t, similar in spirit to a discounted cash flow analysis. It differs from cost-effectiveness analysis, which compares cost per unit of a non-monetized outcome, such as cost per life saved, rather than monetizing every outcome. The hardest and most contested step is assigning dollar values to non-market goods, a life-year, clean air, saved travel time, typically through willingness-to-pay or value-of-statistical-life estimates.

Governments use cost-benefit analysis to prioritize which programs or capital projects to fund, and it is often legally required for major regulations. Common pitfalls include choosing a discount rate that swings the result, high rates penalize benefits that arrive decades out, such as climate or infrastructure programs, and undercounting benefits that resist monetization, such as equity or wellbeing. It works best paired with a program evaluation and a logic model that establish what the causal impact actually is before that impact gets priced. It should not be confused with a randomized controlled trial, which estimates the effect itself rather than its dollar value.