JC Economics Cost Benefit Analysis Essay Model Answers
How many of you realise that, for the A-Level Economics syllabus (9757), questions that test on the concepts on Cost Benefit Analysis (CBA), rational decision making, pursuit of self interest by consumer and producers, the Marginalist Principle, making decisions at the margin, etc appear increasingly frequent in the essay exam questions (Paper 2 Essay), for this topic of Market Failure.
The range of CBA questions can cover topics on externalities (+ve or -ve), market dominance, information failure, etc. The following is a fairly tough question, and contains a micro and macro Econs mix.
(a) You have been tasked to head a team appointed by the government of S’pore to carry out a cost benefit analysis of the building of Terminal 5 at Changi Airport.
Source: Changi Airport T5
(a) Explain why infrastructure such as an airport terminal is often provided by the government. 
(b) Discuss how might the SG Government use the concept of cost benefit analysis (CBA) to decide whether to proceed with the T5 project. 
JC Econs Essay – Cost Benefit Analysis (CBA)
Suggested Essay Outline:
(a) High start up costs: Natural Monopoly, so allows only one firm, and it has be regulated or nationalised.
(b) Quasi public good. Non-excludable but rivalrous.
(d) Creation of jobs, lowers unemployment.
(b) Govts aim to maximise society’s welfare. To do that they need to rely on a set of tools to aid in their decision making. For this question, candidates are expected to display an understanding on that tool and how it is used by the govt. Basically an understanding of social costs and benefits which include both elements of private and external effects needs to be illustrated.
Use examples to illustrate how govt conducts cost benefit analysis to gain a full economic picture of the implications of e.g building an additional terminal. What are the social costs & benefits? How to calculate social costs & social benefits? How to weigh social costs and benefits to arrive at final decision? Highlight to examiners that social costs vs benefits may not be the only considerations. At times when social benefits exceed costs, the task or project may still be rejected for other reasons.
Thesis: Benefits: micro and macro objectives that can be achieved. (Link parts a and b together.)
Anti-thesis: Costs: both explicit and implicit costs.
This part calls for a discussion of the problems involved in calculating all the costs & benefits, in particular the external effects;
The difficulties of predicting values in the present and the future needs to be included in order for the response to gain high credit;
Other evaluative comments include an examination of the techniques involved and the accuracy.
Conclusion: Go ahead! Maintain our hub status! We did delay the construction of T5, no thanks to COVID-19.
More answers: Essay #30 | Essay #32