The Economic Evaluation of Projects

I. PRINCIPLES OF VALUATION This paper summarizes the principles that are used to evaluate projects from an economic point of view. The term ‘project’ should be thought of in the broadest of senses. It can refer to individual investment projects, like the building of a bridge or a dam. More broadly, it can include general expenditure programs, like education, health care or nutrition spending. Or, it can refer to government policies like reforms of the tax-transfer system, or the regulation of economic activities. Our use of the term ‘project’ in what follows should be taken as including all of these. Economic evaluation of a project implies a measure of its net benefits in monetary terms, as opposed to, say, an evaluation as to its political feasibility. Attaching a monetary measure to the benefits and costs of a project raises the fundamental question of whose benefits and costs are relevant. We follow the convention used in much of the economics literature referred to as the principle of welfarism, which holds that what ultimately counts is the welfare of the individuals in the society. Thus, the objective of project evaluation is to measure the benefits and costs accruing to those individuals who are affected. Measuring the benefits or costs of a project to any given individual involves asking how much the individual would be willing to pay to have the benefit or to avoid the cost. What they would be willing to pay will typically differ from what they actually have to pay. They may not have to pay anything if the project involves public goods or