Congratulations to my old friend and fellow Queensland economist Joe Branigan of SMART Infrastructure Facility for his award-winning paper on assessing the value of regional public infrastructure (see photo below). In his paper, published in the Australasian Journal of Regional Studies, Joe and his co-author Fariba Ramezani nicely explain the distinction between a cost-benefit analysis (CBA) and an economic impact analysis (EIA).
For instance, Joe’s paper has an excellent summary of the importance of CBA:
Importantly, CBA provides a solid, comparable framework for estimating the strengths and weaknesses of alternatives by comparing the potential changes in society’s wealth due to the project with that of the relevant alternatives (which may include doing nothing, deferring or otherwise varying the project, or proceeding with an alternative project).
For this reason, economists tend to see CBA as having primacy over EIA, but alas economists are not usually the ultimate decision makers, and EIA is typically given a large weight by decision makers who may have regional economic development objectives in mind.
Broadly speaking, an EIA tells us how much value added and employment a project creates, while a CBA tells us whether it’s worth investing in the project in the first place, recognising there are alternative uses of society’s resources.
That said, a well done EIA should report on the economy-wide impacts of a project (i.e. also modelling any offsetting reductions in activity in other regions or industries as a new project draws workers and capital away from them). But this is not always done, and we too often see incredible estimates of regional jobs being created by particular projects, both directly and indirectly.
Alas, the two distinct though complementary techniques of CBA and EIA are often badly applied by analysts or confused in the minds of decision makers. For an example, see Joe’s 2016 QEW guest post on the Townsville Super Stadium, in which he discussed how regional EIA and CBA were in conflict for that project.