Home / Cost-benefit Analysis
3.10 · Paper 2B
Weigh costs against benefits, put a price on risk, and decide whether control measures and insurance are worth paying for.
Jump to a sub-skill
Each sub-skill has its own animated explanation, step-by-step notes, a past-paper style question and a short worksheet with mark scheme.
See it in action
Scroll to the graphic and it plays by itself — press Replay to watch it again.
The cost–benefit principle: go ahead if the benefits outweigh the costs, once both are measured in the same units (usually money). Net benefit = benefits − costs; the benefit–cost ratio is benefits ÷ costs (worthwhile if more than 1). Sunk costs — money already spent and not recoverable — must be ignored: only future costs and benefits matter.
The expected cost of a risk = probability × cost if it happens. A risk matrix plots likelihood against impact to prioritise risks: a rare but catastrophic risk can have a larger expected cost than a common but minor one.
A control measure reduces the probability or impact of a risk. It is worth it if the reduction in expected cost is more than the cost of the measure. Insurance costs more than the expected loss on average, but protects against a large unexpected loss. Probabilities and costs are only estimates, so check how sensitive the decision is to them.
A council could build a crossing for £120,000. It is expected to save £30,000 a year in costs for 5 years. Should it be built?
Total benefits = 5 × £30,000 = £150,000. Total costs = £120,000.
Net benefit = 150,000 − 120,000 = £30,000. Benefit–cost ratio = 150,000 ÷ 120,000 = 1.25. Benefits outweigh costs, so the project is worthwhile on money alone — but the council should also consider benefits that are hard to price, such as safety.
Practice