- When a project is implemented, people other than its owners, workforce or customers are benefited or disadvantaged by its operation.
- The operation of the project results in a net gain or loss to society but not to those who undertake the project. This category of the benefit or cost is defined as an external effect or externality.
There are two main problems associated with the externalities in the cost benefit analysis. These include
(a) identifying the externality, particularly in the advance of the project operation;
(b) quantifying the value of externality for incorporation into the cost-benefit analysis.
(c) The later involves measuring the impact of the externality on people’s welfare in monetary term and determining its economic value so that it can be included in the economic cash flow of the project.
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