WHEN it comes to assessing the viability of a large project, governments are increasingly likely to commission a cost-benefit analysis (CBA). The aim is to provide an impartial, evidence-based judgment of the costs and benefits of a particular policy or project, without regard to its political ramifications. The British government is particularly keen on CBAs: having pioneered their use in the 1960s it has recently relied on them to make the case for HS2, a controversial high-speed rail link between London, Birmingham and Manchester, and to justify a cull of badgers in the countryside. In theory, putting together a CBA is simple: you simply tot up the costs in one column and the benefits in another. But the reality is rather more complex. With large amounts of money at stake and projects that can last for decades, economists have to use a number of wonkish techniques, some of which are controversial, to come up with a decent CBA. How do they do it?
The simplest and most important concept is a dull economic term: “consumer surplus”. This is the difference between what you are willing to pay for something and what you end up paying. If you’re willing to spend £1 on an apple, but get it for 40 pence, your consumer surplus is 60 pence. Consumer surplus is important because big projects like railways are often not sustainable from a purely commercial perspective. In the case of HS2 one estimate puts the expected revenue from fares at £15 billion, but the overall costs at £25.5 billion. But that is potentially a narrow way at looking at the benefits of such a project. Governments can also look at what they are saving citizens. Consider the case of someone who is used to paying £100 to get from Manchester to London. If HS2 is built, they could pay £40. The commercial benefit of the project is a mere £40; but the CBA will take into account the £60 worth of consumer surplus as well (because that sum is, in effect, unlocked to be spent on other things). Big infrastructural projects often make economic sense only when consumer surplus is taken into account.
