A cost benefit analysis is the identification, measurement and weighing up of the costs and benefits of a project in order to decide whether or not it should go ahead.It is necessary for the government to use this because it is important that they determine whether or not the project will be detrimental to the economy, society or both. If the costs to society are greater than the benefits to society, then society will end up suffering. This is very important to governments, because of the short term populist voting cycle in many modern democracies.
Governments cannot make people unhappy or create problems in society because if they do so it is likely that the society will not vote for them in the next elections. One of the prime aims of government in a representative Democracy such As the Uk or America is to stay in office and in doing so have a greater influence on policy.It is also necessary because the well being of the economy is in the governments interest. If the economy becomes weak, and demand drops, firstly the government will collect less in tax revenues.
Secondly stagflation in the economy may occur. Stagflation is stagnation in the economy, leading to inflation. The government does not want excessive inflation, because it will affect groups of voters adversely.
People on fixed pensions (the majority and therefore a more powerful voting bloc) lose, whereas others in better positions (the minority, a less powerful voting bloc) gain. It also raises taxes though fiscal drag, which will not please either of these groups.It redistributes wealth from lenders to borrowers; in inflation the rate of inflation may be well above the interest rate. Lenders are paying a real negative interest rate to borrowers for the privilege of lending to them. This will disadvantage banks and lending institutions and the rate of interest may well be lowered, which does not benefit prudence or reduce people s propensity to invest in banks.A cost benefit analysis is also important in evaluating the costs to the environment. With global warming and the deterioration of the ozone layer, pollution and the deterioration of the environment has become a major political and economical issue.
It is important that governments do not destroy the environment and in doing so not benefit society more than proportionately, for if they do so they will face the wrath of politically powerful pressure groups such as Greenpeace with a huge voting membership which may reduce their popularity.It is also important financially because it allows government s to know how much a project will cost and whether it is sustainable. Both of these are key issues.
If a project costs too much, no matter its benefits, it cannot go ahead, for example giving every member of the UK 5 pieces of fruit a day and forcing them to eat it would not be viable because it would be too expensive even if it did lower cancer deaths and improve the health of the nation.If a policy is sustainable it allows our generation to meet our own needs without impairing the ability of future generations to meet theirs. This is important because it is in the interest of the government to have a healthy economy and society in the future and not just in the short term.In conclusion, it is very important for a government to use a cost benefit analysis in order to measure the future ramifications on society and to prevent these ramifications if too extreme or condone them if they are a benefit to society.