​Valuation of Costs and Benefits:

CBA should provide a clear and consistent picture of the relative costs and benefits of
alternative proposals to assist decision makers. With the relevant costs and benefits identified,
the next step is to assign dollar values.

It is not the role of analysts to decide in advance the proposals/options they believe are
the most appropriate and weight the analysis accordingly.
In general, all benefits and costs should be quantified and valued in dollar terms unless
it is clearly impractical to do so. This may happen because the costs and benefits:
i. cannot be reliably measured, or
ii. are not significant to the analysis, or
iii. are significant to the analysis but the resource/staff cost of attempting to value them
outweighs the advantage of including them in the analysis.

1. Real versus nominal values

Costs and benefits should be valued in ​real ​terms (constant prices) as opposed
to ​nominal ​terms (prices at the time the goods or services were provided). That is, the
impact of inflation is eliminated from the analysis because we are interested in costs
and benefits in a common money value. The only time that we make ​real​ adjustments to
prices over time is if the price of a particular good or service is expected to increase or
decrease ​relative ​to all other goods and services. In such cases the relative change
should be quantified and built into the analysis. Common examples where relative price
changes maybe relevant to the analysis are:
● high technology products for which prices are expected to fall in real terms e.g. the very
latest computer technology
● high technology products for which prices are expected to rise in real terms e.g. health
technology and defence hardware
● natural resources where supply is scarce or constrained e.g. oil/petrol and electricity,
and/or
● wages and other input prices that are expected to increase faster than the rate of
general inflation.
A useful working rule is that we assume the costs of a good or service will remain
constant in real terms (i.e. before inflation) unless we are reasonably sure that its price
will change relative to all other prices in the economy.
2. Valuing Costs and Benefits Using Market Values
(quantitative factors):

Costs and benefits should normally be based upon market prices as they are the
easiest to identify and usually reflect implicit opportunity costs. Real or estimated market
prices are therefore the starting point when attempting to value costs and benefits.
However, market prices may need to be adjusted for distortions such as tax differences
between options or monopoly pricing.
(​Real or estimated market prices (qualitative or intangible factors measured by Shadow
Prices) provide the first point of reference for the value of benefits.
There are a few exceptions where valuing at market prices is not suitable. If the market
is dominated by monopoly suppliers, or is significantly distorted by taxes or subsidies,
prices will not reflect the opportunity costs and adjustments may be required and
specialist economic advice will be needed. An example of this is the effect of EU
subsidies on the market for agricultural land).
3. CBA Valuations Should Represent Consumers or Producers
Valuations As Revealed by Their Actual Behavior:

The valuation of benefits and costs should reflect preferences revealed by choices
which have been made. For example, improvements in transportation frequently involve
saving time. The question is how to measure the money value of that time saved. The
value should not be merely what transportation planners think time should be worth or
even what people say their time is worth. The value of time should be that which the
public reveals their time is worth through choices involving tradeoffs between time and
money. If people have a choice of parking close to their destination for a fee of 50 cents
or parking farther away and spending 5 minutes more walking and they always choose
to spend the money and save the time and effort then they have revealed that their time
is more valuable to them than 10 cents per minute. If they were indifferent between the
two choices they would have revealed that the value of their time to them was exactly
10 cents per minute.
The most challenging part of CBA is finding past choices which reveal the tradeoffs and
equivalencies in preferences. For example, the valuation of the benefit of cleaner air
could be established by finding how much less people paid for housing in more polluted
areas which otherwise was identical in characteristics and location to housing in less
polluted areas. Generally the value of cleaner air to people as revealed by the hard
market choices seems to be less than their rhetorical valuation of clean air.
(( Methods to value the environmental goods are either based upon
1) assessing the market impact of environmental changes through “effect on
Production” or mitigating expenditure or replacement cost measures or
2) Individual’s preferences either revealed or expressed for the environmental change.
Market based measures are used to estimate the value of an environmental good, such
as air pollution through changes in the price and quantity of marketed outputs affected
by the pollution. Clearly not all environmental nor cultural goods are marketed. In these
situations, values need to be determined through revealed and expressed preference
techniques. However, only expressed preference methods can be used to determine
the non-use value of environmental and cultural goods. ))

Benefits Are Usually Measured by Market Choices:

When consumers make purchases at market prices they reveal that the things they buy
are at least as beneficial to them as the money they relinquish. Consumers will increase
their consumption of any commodity up to the point where the benefit of an additional
unit (marginal benefit) is equal to the marginal cost to them of that unit, the market price.
Therefore for any consumer buying some of a commodity, the marginal benefit is equal
to the market price. The marginal benefit will decline with the amount consumed just as
the market price has to decline to get consumers to consume a greater quantity of the
commodity. The relationship between the market price and the quantity consumed is
called the demand schedule. Thus the demand schedule provides the information about
marginal benefit that is needed to place a money value on an increase in consumption.