Level of Effort

The appropriate level of effort to be invested in the analysis depends on its expected payoff.

Resources needed to perform the benefit-cost analysis should be weighed against the value of the analysis in determining the most cost-effective project. If the proposed project has very high costs, it is clearly worth considerable effort to determine whether benefits exceed costs and to identify the most economically advantageous alternative. Conversely, the analytical effort should not be greater than what would be lost by pursuing a project that was not cost-beneficial or selecting the less cost-effective of two projects. In most situations, the incremental payoff from choosing the right alternative far exceeds the resources consumed in doing the benefit-cost analysis

In any analysis, effort should be concentrated on estimating and valuing the benefits and costs that are largest and that differ the most between projects.

Examples

Adding another runway to San Francisco International Airport
This project has very high monetary costs and significant environmental, economic, and noise effects. A thorough benefit-cost analysis including all of these effects and comparing the project to operational modifications that could provide similar benefits is justified.

Comparing asphalt to concrete for resurfacing a section of highway
The effects of these paving materials are similar except for their cost and longevity. The analysis need only deal with the differences between these two materials and need not consider the effects of not repaving.

Prioritizing resurfacing projects
A graph illustrates how the priorities of projects can be plotted so that their costs can be compared with their benefits.
In this case, the issue is not which type of paving material to use but which projects to undertake first. The benefits of resurfacing are two-fold: first, vehicle operating costs, travel times, and perhaps accident risk are reduced due to a smoother road surface; second, the road bed is not undermined requiring costly repair. The first type of benefit depends on road condition and the amount of traffic. The second depends on road condition, heavy truck traffic, and perhaps weather conditions. The alternatives would be alternate project schedules, for example sections A, B, and C in year 1, sections D and E in year 2, and so forth, or sections B and E in year 1, and so forth. Since there are many possible scheduling alternatives, a simpler approach could be followed. First, any project, which if delayed would result in serious damage to the road bed should have the highest priority, because the avoided costs are likely to be greater than the benefits from a smoother surface. Then a graphical display can be used to prioritize projects for which a smoother surface is desired. Benefits are measured on the vertical axis and costs on the horizontal axis. For a given budget, projects should be selected according to the slope of the line from the benefit-cost point to the origin, with those with the greatest slopes having the highest priority. A has the highest benefits relative to its cost, and should be done first if resources permit. If not, H is the next most cost-beneficial. The costs of E are greater than its benefits, so it is not cost-effective at this time.

Comparing rail versus express bus service
A community that institutes a transit service is committing to substantial long-term operating costs, and in the case of rail, a substantial capital investment that cannot be converted to another use. Therefore, substantial effort in the benefit-cost analysis is justified. Before the two modes can be compared, the most cost-effective service alternative for each mode must be determined; then the best service alternatives for each of the two modes are compared.