Concept

Suppose the federal government is contemplating a highway construction plan. Because the economy's resources are limited, any decision to use more resources in the public sector will mean fewer resources for the private sector. There will be both a cost and a benefit. The cost is the loss of satisfaction resulting from the accompanying decline in the production of private goods; the benefit is the extra satisfaction resulting from the output of more public goods. Should the needed resources be shifted from the private to the public sector? The answer is yes if the benefit from the extra public goods exceeds the cost that results from having fewer private goods. The answer is no if the cost of the forgone private goods is greater than the benefit associated with the extra public goods.

Cost-benefit analysis, however, can indicate more than whether a public program is worth doing. It can also help the government decide on the extent to which a project should be pursued. Real economic questions cannot usually be answered simply by yes or no but, rather, are matters of how much or how little.

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