The economic foundations of CBA revolve around determining how benefits and costs should be valued in CBA studies. Key concepts include calculating the Net Benefit (NB), which is the difference between the total economic benefit (the sum of consumer and producer surpluses) and the total cost.

We will also examine how projects can lead to changes in total economic benefit by improving efficiency and consider the concept of allocative efficiency, which involves comparing benefits and costs to identify potential gainers and losers.
 

Allocative efficiency is another crucial aspect we explore. By utilizing the Kaldor-Hicks compensation test, potential gainers, and a demand/supply diagram, we determine whether a project achieves allocative efficiency. Factors like willingness to pay and marginal benefit play a significant role in this assessment.

One crucial aspect of CBA is understanding consumer demand and consumer surplus. By analyzing consumer preferences and willingness to pay for a product or service, we can estimate the demand curve and calculate consumer surplus.

Consumer surplus represents the additional value consumers receive when they pay a price lower than their maximum willingness to pay. This understanding helps decision-makers assess the potential benefits associated with a project or policy.

Cost, price, and producer surplus are integral to CBA. By examining the relationship between cost and price, we can estimate the producer surplus, which represents the additional value gained by producers when they receive a price higher than their minimum acceptable price.

Understanding producer surplus helps in evaluating the costs and potential benefits for producers associated with a project.

In this section, we explore the concept of supply and its relationship with minimum supply-price and marginal costs. Supply represents the quantity of a product or service that producers are willing to provide at different price levels. Minimum supply-price refers to the price at which producers are willing to supply a specific quantity. Marginal costs represent the additional cost incurred by producers to produce one more unit.

Analysing these factors allows us to assess the supply side of a project or policy and understand its implications.
 

Building upon the previous section, we focus on a producer's supply and the associated producer surplus.

By analyzing the producer's perspective, we can evaluate their willingness to supply at different price levels and estimate the producer surplus. This understanding enables us to assess the potential benefits and costs for producers and consider their role in cost-benefit analysis.

Efficiency in markets plays a crucial role in CBA. An efficient market is one where resources are allocated optimally to maximize total economic benefit. We will explore the concept of efficiency and how it is achieved through the interaction of demand and supply in a market.

Factors such as competition, information symmetry, and absence of externalities contribute to market efficiency.

By analyzing market efficiency, decision-makers can gain insights into the potential benefits and costs associated with a project.

This section focuses on the relationship between market evaluations and cost-benefit analysis.

We will examine how market evaluations, based on supply and demand analysis, can provide valuable insights for conducting CBA. By incorporating market evaluations into the analysis, decision-makers can make informed judgments about the potential benefits and costs of a project or policy.

Here we connect the dots between market evaluations and CBA.