An application of cost benefit analysis to rural electrification

Abstract

The purpose of Benefit-Cost Analysis is to evaluate benefits and costs 'correctly' while comparing competing alternatives and choose the best of them in order to maximize society's benefits. If every input is cost at its shadow price, then the total cost of resources used in the project is the value of the next best benefit foregone, and in this case if the benefit of the current project exceeds the cost, then the benefit is maximized, since the current project has yielded an amount in excess of any other possible project, as indicated by the shadow cost of inputs. If, however, only the market costs of inputs are used, then it becomes necessary to company the net benefit of the project with its closest alternative to ensure that the current project is indeed better than any other feasible alternative. The theory of funds allocation requires only the best alternative to be chosen in case there is a funds constraint. But normally, in many project appraisals done, it is the market costs of inputs which are taken as project costs (because of convenience) and at the same time the compulsion of comparing alternatives is ignored; with the result that the allocations so made do not maximize society's benefits. The present study proposes a 'Relative Net Benefit' measure, the application of which will make comparison of alternatives explicit and mandatory and hence will maximize the benefits even when market costs are used. As regards valuation of outputs under competitive conditions, the study integrates the consumer's surplus analysis with the equilibrium analysis and extends it to two specific contexts encountered in the Project evaluation, viz. when the output of the project adds to the existing supply of goods, and when the output is the product of a technology which replaces an existing technology. These concepts are then illustrated in the Rural Electrification Context. The objective of the study is, given a certain rural electrification budget at the State level, how to allocate these funds to competing Clusters of villages, in order to maximize benefits. Given the social choice that all villages must be electrified someday, the benefit maximization rests on electrifying those villages first which offer maximum benefits. The analysis is applied by choosing three of the most promising talukas in the Gujarat State, by virtue of their underground surplus Water potential for the remaining unelectrified villages, and arriving at a ranking between them.