Which statement below is true regarding a cost-benefit analysis?

• A. It cannot be used to inform policy decisions since it does not consider real-world consequences.
• B. It is an example of positive analysis because it evaluates outcomes based on factual costs and benefits.
• C. Cost-benefit analysis ignores the actual data and focuses only on ethical considerations.
• D. It is purely normative because it always involves value judgments about what should be done.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the difference between positive and normative analysis in economics. Positive analysis deals with objective, fact-based statements about how the world is, while normative analysis involves subjective value judgments about how things should be.
2. Step 2: Recognize that cost-benefit analysis (CBA) involves comparing the factual costs and benefits of a decision or policy, which means it is grounded in positive analysis rather than normative analysis.
3. Step 3: Note that CBA uses real-world data to evaluate outcomes, so it does not ignore actual data; instead, it quantifies costs and benefits to inform decisions.
4. Step 4: Understand that CBA can be used to inform policy decisions by providing a systematic way to weigh the pros and cons based on factual information, so the statement that it cannot be used for policy decisions is incorrect.
5. Step 5: Conclude that the true statement is that cost-benefit analysis is an example of positive analysis because it evaluates outcomes based on factual costs and benefits.