4. Cost-benefit analysis attempts to:
A. compare the real worth, rather than the market values, of various goods and services.
B. compare the relative desirability of alternative distributions of income.
C. determine whether it is better to cut government expenditures or reduce taxes.
D. compare the benefits and costs associated with any economic project or activity.

Question

4.    Cost-benefit analysis attempts to:
A.    compare the real worth, rather than the market values, of various goods and services.
B.    compare the relative desirability of alternative distributions of income.
C.    determine whether it is better to cut government expenditures or reduce taxes.
D.    compare the benefits and costs associated with any economic project or activity.

BlackTom AI · Accepted Answer

Cost‑benefit analysis evaluates a project's or policy's advantages and disadvantages by measuring both benefits and costs in comparable (usually monetary) terms, then comparing them to decide whether the project is worthwhile.

Relevant knowledge points:
- Purpose: to determine whether the total benefits of an economic project exceed its total costs.
- Key steps: identify all benefits and costs, assign monetary values (including shadow prices when market prices are distorted), discount future flows to present value, and compute a summary metric such as Net Present Value (NPV = PV of benefits − PV of costs) or Benefit‑Cost Ratio (BCR = PV of benefits / PV of costs).
- Decision rule: accept projects with NPV > 0 (or BCR > 1).

Step‑by‑step reasoning:
1. List expected benefits (e.g., increased output, time saved, health improvements) and expected costs (construction, maintenance, environmental damage).
2. Monetize each item where possible; use nonmarket valuation techniques when necessary.
3. Discount future benefits and costs to present values using an appropriate discount rate.
4. Calculate NPV: sum of discounted benefits minus sum of discounted costs. If NPV > 0, benefits exceed costs and the project is justified.
5. Alternatively compute BCR; if BCR > 1, benefits exceed costs proportionally.

No numerical calculation is required here; the conceptual decision rule suffices.

Why D is correct:
Option D states that cost‑benefit analysis compares the benefits and costs associated with any economic project or activity — this is the standard and precise definition of CBA, including the practice of converting impacts to a common monetary metric and comparing present values.

Why other options are incorrect:
- A: “Compare the real worth rather than market values” misstates CBA — CBA often uses market values where available and uses adjustments (shadow pricing) only when market prices are distorted; it is not primarily about “real worth” in that vague sense.
- B: Concern with alternative distributions of income is normative welfare or equity analysis, not the core function of CBA.
- C: Choosing between cutting expenditures or reducing taxes is a fiscal policy choice; CBA might inform such choices but that specific tradeoff is not the definition of CBA.

Conclusion: The correct answer is D, consistent with the provided answer.

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