Basic questions about “cost/benefit analysis”

Transit projects, like all government projects, have costs and benefits, so one classic way to evaluate project proposals has been the “Cost/Benefit Analysis” (CBA).  Add up all the benefits, add up all the costs, divide benefits by costs and announce the Benefit/Cost Ratio (BCR).  If the it’s below 1, which means the costs exceed the benefits, you kill the project.  The higher the it is, the better the project.

In the Financial Post (part of Canada’s National Post), Peter Shawn Taylor argues that the Cost/Benefit Analysis is the best way to evaluate a project, and that bad projects are being advanced by a newfangled thing called Multiple Account Evaluation (MAE).  I encourage you to be bored by this dispute, but not before you understand it.  Neither of these methods is sufficient to end a passionate argument, and it’s important to know why they never will be.

The problem with Cost/Benefit analysis is that it requires you to convert all the costs, and all the benefits, to the same currency.