Cost-Benefit Analysis Is a Myth?
The EPA announces a new regulation limiting mercury emissions from coal-burning power plants; their coal industry cost estimate was $750M a year with a public health cost estimate of $50M a year. A Harvard Center for Risk Analysis study agreed with the $750M number but put the health cost at $5B. How does something like this happen?
Strategy+Business covers this and other examples in it’s excellent article on “The Myth of Cost Benefit Analysis“. My experience with cost-benefit analysis is on large technology projects. Typically the problem is that too many areas are considered with not enough analysis of the likelihood that a specific business process will be successful. Without this kind of depth of analysis, cost-benefit numbers are subject to wild fluctuations.
Have you recently gone through a cost-benefit analysis? Did it prove to be accurate? Why or why wasn’t it successful?
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POSTED IN: 101 Basics
1 opinion for Cost-Benefit Analysis Is a Myth?
Ren Garcia
Mar 30, 2008 at 10:05 pm
The problem with cost-benefit analysis lies (pun intended) in the saying: figures don’t lie, but liars figure.
In many cases, the factors that are included in the analysis are made to serve whatever result the analyst wants to generate. If he wants the project to proceed, he will include all the benefits possible / imaginable and select only the obvious costs (most often, only the quantifiable factors). If he wants to shoot down the project, he will skimp on the benefits and be extravagant on the costs.
In a dam project in the Mountain Province (Philippines), the proponent cited the hectares of irrigation and megawatts of energy that will be generated, but neglected to include the effects of the inundation of ancestral lands of the indigenous tribes in the area, i.e., dislocation of families, loss of ancient burial caves, destruction of the environment. and other social costs.
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