Example 1

Dam case study

A small dam, such as the one below, is to be constructed by your water company to allow for small-scale hydroelectric generation and to control flooding into a residential district. There will also be some recreational activity opportunities once the dam has been built.

Figure 1.6: Dam case study

Image source: AdobeStock (Accessed on 14.03.2022)

Costs would be:

• materials = £500,000
• labour = £600,000
• Total cost = £1,100,000

If there were no changes in monetary value with time and the company received the following benefits:

Dam construction - total cost = £1,100,000

Total benefits when built:

• Recreation = £400,000
• Recreation = £400,000
• Electricity = £500,000
• Total benefit = £1,200,000
• Net benefit = £100,000

benefit exceeds cost, so the dam appears to be a good investment.

But, in the real world, where time is a variable, the dam project is revisited:

• Total costs accrue at start of construction (t = 0)
• Total benefits accrue when the dam is finished (t = 1)
• Discount rate = 10%

Should the dam be built? Consider the data, then select the button below to reveal our suggestion:

Pause and reflect

To decide whether society should build the dam, what other information may be needed, e.g. environmental and social impacts, i.e. non-economic impacts? Can you think of or find an example of something other than direct cost or benefit?