benefit-cost analysis

A benefit-cost analysis compares the benefit generated by an activity with its opportunity cost of production. The rule is that if benefits exceed costs, then the activity is efficient and should be undertaken.

In some cases, the end result of benefit-cost analysis is net benefits, which is benefits minus cost. A positive value means the activity is efficient.

In other cases the end result of benefit-cost analysis is a benefit-cost ratio, which is benefits divided by costs. A ratio greater than 1.0 is thus the indication of an efficient activity.

(Derived from the Econguru glossary.)

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