Social Cost Benefit Analysis:

Take an For example:

Suppose, a manufacturer produces cigarettes and sell it Rs.40 a packet
and another manufacturer produces soaps and sell it Rs.20 a bar.

Now, if we think about the impact of soaps & cigarettes on the society, the questions may be

Does the price of cigarettes take account of the smokers higher probability of heart disease or
cancer?
Does the price of soap take note of the benefits from the use of soap, e.g., reduced risk of spread
diseases?

Obviously, a commercial entrepreneur cant give well answer to
these questions. What is Social Cost Benefit Analysis?
So, to reflect the real value of a project to society, we must consider the impact of the project on
society. Impact ositive egative ocial enefit ocial ost Thus, when we evaluate a project
from the view point of the society (or economy) as a whole, it is called Social Cost Benefit
Analysis (SCBA)/Economic Analysis.

Scope of SCBA:
SCBA can be applied to both Public & private investments
Public Investment: SCBA is important especially for the developing countries where govt. plays
a significant role in the economic development. rivate Investment: Here, A is also
important as the private investments are to be approved by various governmental & quasi-
governmental agencies.

Objectives of SCBA:
The main focus of Social Cost Benefit Analysis is to determine:
1. Economic benefits of the project in terms of shadow prices;
2 The impact of the project on the level of savings and investments in the society;
3. The impact of the project on the distribution of income in the society;
4. The contribution of the project towards the fulfillment of certain merit wants (self- sufficiency,
employment etc).

Significances of SCBA:
SCBA has been emerged with some interesting significances.
These significances also make the SCBA different from the CBA.
Market Imperfections: Market Imperfections:Market prices, the basis for CBA, do not reflect
the social values under imperfect market competition
Externalities: A project may have beneficial or harmful external effects that are considered in
SCBA, not in CBA.
Taxes & Subsidies: From the social point of view, taxes & subsidies are nothing but transfer
payments. But in CBA, taxes & subsidies are treated as monetary costs and benefits respectively.
Concern for Savings: In SCBA, the division between benefits & consumption is relevant
wherein higher valuation is placed on savings. But in CBA such division is irrelevant.
Concern for Redistribution: In SCBA, the distribution of benefits is very much concerning
issue where commercial private firm does not bother about it.
Merit Wants: Merit wants are important from the social point of view and therefore, SCBA
considers these wants Approaches to SCBA

Aspects:
Contribution to industrial, sectoral infrastructural and economical development as a whole
Improvement in socio-economic status of people in the region
Balance Regional Economic Development
Contribution to Govt. exchequer
Net Impact on Balance of Payments
Savings/Earnings in Foreign Exchange
Export Promotion / Import Substitution
Employment Potential
Distribution of Income in Society
Ecological Implications (Power plants, irrigation schemes, etc.)
Environmental/Pollution Implications (Bulk drugs, chemicals,
leather, etc.)
Social and cultural values associated



EFFECTIVE RATE OF PROTECTION:
The effective rate of protection is a commonly used measure of net
effect of trade policies on the incentives facing domestic producers. The measurement of
effective protection is clearly a two stage process first determining the nominal protection of
the policies in question, and second, analyzing the implications for effective protection of
different firms, sectors or activities.
Just as increases in nominal protection reduce overall economic
welfare by distorting the information provided by domestic prices about relative scarcities of
different goods, increases in effective protection cause economic waste by inducing producers to
supply goods domestically even when their domestic costs are higher than their opportunity costs
through trade. At the same time, producers of goods with relatively low levels of effective
protection are induced to refrain from producing goods domestically even when this could be
done at a lower cost than in international markets.

The effective rate of protection measures the net protective effect on producers of
any product due to the structure of protection on both its inputs and its outputs.

Consider a simple example:

roducer of garments that requires only one intermediate input cloth. Suppose that production
of garments worth 100 at world market prices requires the use of cloth worth 75 in world
markets. World value added or the cost of all manufacturing margins, including labor and
normal returns to capital is 25 (the difference between 100 and 75).

Now consider a domestic producer of garments in a county providing nominal protection at a
rate of 30 percent on garments and 20 percent on cloth. The protection provided to garments
is clearly beneficial to garment makers, while that on cloth is harmful. What is the net effect?
The net effect depends not only on the nominal protection, but also on the market in which
the producer wishes to sell.
1. Sales in the Domestic Market:
Under this structure of protection the domestic price of garments becomes 130 (100 times 130
percent) while the cost of the cloth required to produce these garments becomes 90 (75 times 120
percent). The maximum domestic value added (or cost of all manufacturing margins) that will
permit domestic garment producers to still be able to compete with imports is 40 (130 minus 90),
which is higher than world value added of 25. In other words, domestic value added permitted
by the structure of protection on cloth and garments is 160 percent of or 60 percent higher than
world value added. This increase in domestic value added permitted by the protection structure is
known as the effective rate of protection provided to local garment production directed at the
domestic market.



2. Exports to World Markets
Consider now a garment producer working under the same
protection structure but wanting to sell for export in world markets. In this case, the domestic
protection of garments is of no assistance; in order to compete in world markets, the garments
must be priced at 100. However, the protection of cloth still raises its cost to 90 (75 times 120
percent).
In order to compete in the export market, therefore, the producer
must be able to manufacture garments with a margin of no more than 10 the domestic value-
added permitted in this case cannot exceed this amount. This is substantially less than world
value-added. In other words, the effective protection provided by the domestic protection
structure in this case is negative minus 60 percent (the domestic value-added of 10 is 60
percent less than world value-added of 25).

This example illustrates an important point. Nominal protection in
the domestic market does not provide any benefit to domestic producers wanting to sell this good
for export. However, protection of goods which are a firms inputs raises production costs and so
provides negative effective protection to exports.

The only way around this is to eliminate protection of inputs
altogether, or to provide special provisions whereby goods used as inputs by exporters are free of
the cost-raising effects of protection. Export processing zone privileges usually include tax-free
access to imported inputs; duty drawback and exemption programs for exporters have a similar
effect.

DOMESTIC RESOURCE COST

(DRC) is a measure, in terms of real resources, of the opportunity
cost of producing or saving products to foreign exchange. It provides a comparison between the
domestic costs to produce a given good with its value added at international price. It is thus an ex
ante measure of comparative advantage, used to evaluate exchange projects and policies. The
term was introduced to the economics literature by Bruno (1963, 1972). It was used frequently
since this date by many economists and international institutions such the World Bank, which
use it mainly to evaluate development policies in less developed countries.
The DRC sought to take account of market-factors distortions in
contexts where factors opportunity cost could be measured in domestic currency, and the
opportunity cost of tradable products and inputs can be measured in a foreign currency. By
separating the two types of factors, this ratio allows ranking of activities without knowing the
shadow value of foreign exchange. A shadow exchange rate is still necessary to determine the
cut-off between efficient and inefficient activities
The DRC provides also comparison of the relative economic
efficiency in production across sectors. In fact, the comparison of DRC calculations values
across sectors provides estimation on which sector can use more efficiently domestic resources
than others. According to this, policy makers can take efficient decisions on domestic factor
allocation between sectors.
Moreover, examined in conjunction with the goals and incentives
supplied by economic policy, the DRC can also be used as an indicator of the impact of
restrictions to external trade (Ruiz, 2003). It provides, according to the same author, an
approximation of the effects of trade policy on the efficiency of the allocation of production
resources and hence of the influence of trade policy on the productive structure in a given
country.
The analytical form of the DRC ratio can be represented by the value of
non tradable inputs (primary production factors) evaluated at their opportunity cost divided by
the value added of this product evaluated at border/frontier prices.

Opportunity costs of domestic resources
DRC = -------------------------------------------------------
Value added in border price