Benefit‐Cost Ratios: Failures and Alternatives

Abstract

Despite decades of criticism, the benefit-cost ratio remains one of the most common measures of performance employed in economic evaluation of engineering projects. This paper reviews the problems inherent in this measure of economic performance and suggests alternative measures in its place. It is shown that there are many common circumstances in which the benefit-cost ratio is an unrealiable indicator of a design's economic desirability and comparative economic performance. These problems result largely from the economically arbitrary nature of most classifications of benefits and costs. The ratio measure should be dropped from all serious economic-evaluation manuals and protocols. Some alternative measures are discussed.