The point of departure for social cost-benefit analysis is that it does not
accept that actual receipts are a true measure of social benefits or that actual expenditures
are a true measure of social costs. Not only will actual market prices
often diverge from their true value, but private investors also do not take into
account the external effects of their decisions. These externalities can be sizable
and pervasive. In other words, where social costs and benefits diverge from
private costs and benefits, investment decisions based entirely on the criterion
of commercial profitability may lead to wrong decisions from the point of view
of social welfare, which should be the government’s primary concern. Although
social valuations may differ significantly from private valuations, the practice of
cost-benefit analysis is based on the assumption that these divergences can be
adjusted for by public policy so that the difference between social benefit and
cost will properly reflect social profitability just as the difference between actual
receipts and expenditures measures the private profitability of an investment.