Estimation or the Social Product
Here we repeat that, in the under-developed countries, there is likely to be considerable divergence between the private and social product, especially in the case of building up the necessary infrastructure or the social and economic overheads. This divergence is due ultimately to external economics which in practical life are not easy to define and calculate. An investment creates external economies by increasing the demand for certain factors of production and products and thus making it possible for the existing units of production to turn out larger output
In this, we face some difficulties: In estimating the social product of an investment, account must be taken of the increase in output accruing from investments whose profitability it has increased. Tile output of the supplementary investments wan be treated as the social product of initial investment if it creates by itself the additional capital required for the supplementary investments. Since one investment leads to another how far can we go on pursuing the effects of an investment? It is better. therefore. to avoid this pursuit and confine ourselves to a definite time period and region and lump together the initial and the likely induced invent truants and relate this total to the total of expected increases in output resulting therefrom. If increases in output save foreign exchange either by increasing exports or by replacing imports. greater value should be put on them, since foreign exchange presents a great problem to the under-developed countries
Relevant Constraints. These constraints ‘are physical, legal. distributional constraints and budgetary constraints. The most common physical constraint is the production function which relates the physical inputs and outputs of a project. This directly enters into the calculation of costs and benefits. One of the inputs or some inputs may be in totally inelastic supply. Then, the investment must conform to the legal framework. The legal contradistinction, for instance, from regulated pricing. Administrative constraints arise from what can be administratively handled. The distributional constraints arise from the fact that no section should be unfavorably affected in the matter of income distribution. It is not always possible to make the gainers compensate the losers. There arc budgetary constraints, since projects have to be executed within the budget allotment
Conclusion. The whole purpose of the cost benefit analysis is to select the projects for investment or lay down the investment criteria. Where no projects are inter-dependent or mutually exclusive, aim where there arc no constraints. the projects which maximize the present value of total benefits Sics total costs can be indicated as under.?
I. Select all projects where the present value of benefits exceeds the present value of costs.
2. Select all projects where the ratio of the present value of benefits to the present value of costs exceeds unity.
3. Select all projects where the constant annuity with the same present value of benefits exceeds the constant annuity (of the same duration) with the same present value as costs.
4. Select all projects where the rate of return exceeds the chosen rate of discount