Cost-benefit analysis and project evaluation: A comparison of alternative approaches

A cost-benefit criterion is devised to identify small projects which increase production efficiency in a small open economy. This productive efficiency criterion requires only local information on the country's technology. Conditions which make this criterion consistent with more complex criteria based on consumers' preferences as well as technology are investigated in the second half of the paper. We find that the appropriate project evaluation criterion depends on what set of tax and transfer instruments the government can vary. Assuming that the government cannot vary tariffs but can vary all commodity taxes, we find that our initial productive efficiency project evaluation criterion is still valid. Assuming that the government cannot vary tariffs or commodity taxes but can vary direct transfers to consumers leads to a different project evaluation criterion, a generalized Harberger-Bruce-Harris criterion.