The Theoretical Structure of Cost-Benefit Criteria, Choice of Project and Discounting Process

Abstract

Cost-benefit analysis is a powerful tool of decision aid in increasing the probability of arriving at good decisions. Its strength and appeal in decision analysis lie on a number of its logical properties: a) a systematic approach in assembling together the set of alternatives, b) a comprehensive accountability of implied costs and benefits of the alternatives, c) a flexibility in allowing alternative goals and objectives to be analyzed, d) a framework of allowing an index of choice to be constructed on the basis of costs and benefits and e) the ranking of decision alternatives by cost-benefit index. In a companion volume devoted to identification and measurement theory we dealt with properties (a) and (b). This chapter will deal with properties (d) and (e). The index for ranking alternatives for choice is called criterion index. This criterion index must be constructed. In order to construct an appropriate index it is useful to know the desirable properties of ranking indexes since the criterion index may assume many different forms. The analysis of the desired properties in theoretical and applied problems have received treatment in some literature such as Bentkover et al [548], Eckstein [203a] [203b] Lesourne [628] Layard [627], Somers [647], Mishan [634] Sugden [649] and others.