The importance has been explained with the help of the following factors that affect the general masses as a whole.
Market Failure
Market failure when a big project is not affecting everyone but only a few. A private firm would only look at profitability and related market prices to take up a deal but the government has to look at other factors. To determine the social cost in case of market failure and when market prices are unable to define them. These social costs are known as shadow prices.
Savings & Investment
Impact of the project on general savings and investment level. A project that induces more savings are investment in an economy and not the other way round.
Distribution & Redistribution of Income
The project should not lead to accumulating income in the hands of a few but, it should equally distribute the income.
Employment and Standard of Living
How a project affects employment and standard of living will be taken into account as well. The deal should lead to increase in employment and standard of living.
Externalities
Externalities are impacts of a project which can be both harmful and beneficial. Therefore, both the effects are to be assessed before sanctioning a deal. Positive-externalities could be in the form improvement in technology and negative-externalities could be in the form of increase in pollution and destruction of ecology.
Taxes and Subsidies
In a general cost benefit calculation, taxes and subsidies are considered as expenses and income respectively. Though in case of social-cost benefit analysis, taxes and subsidies are considered as transfer payments.
Social cost benefit analysis enables the government to take up new developments which will benefit everyone and not just a few. Also, it helps in bringing about an overall development in an economy and can help make decisions that will increase employment, investments, saving and consumption, thus, improving the economic activities in an economy.
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