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Social return on investment is a way of measuring the effects of an action on the environment and people not directly involved. Economists quantify costs and benefits to encourage people to consider their place in the world. Evaluators measure the net benefit of a stock and express it in dollar amounts to determine social return on investment. Policy makers can implement strategies to involve parties who benefit in paying the cost, such as making a toll road. Identifying and quantifying benefits is difficult, but researchers can use surveys or proxy data.
Social return on investment is a concept of return on investment that attempts to encapsulate the effects an individual action has on the world. It includes environmental effects and consequences for people who are not directly involved in the action. Often these effects are not easy to measure, but economists try to devise ways to quantify the social return. By quantifying the costs and benefits of actions, economists and policy makers hope to encourage people and organizations to consider their place in the world.
The idea of social return on investment is closely linked to the concept of externality. Let’s say your neighbor decides to plant a garden. Weigh the cost of the plants and how much work planting them against the enjoyment they expect to receive. However, you can also look at the flowers, so it’s underestimating the benefits of garden planting. If she decides not to plant it, she may be making an inefficient choice, because your enjoyment may tip the cost-benefit analysis to the positive side.
In this example, your enjoyment of the garden is a positive externality because it is a benefit that the person making the decision ignores. The socially efficient result will only happen if you and your neighbor coordinate, so you play a role in supporting his gardening project. This is what policy makers using social return on investment are trying to achieve.
To determine the social return on investment, evaluators must first measure the net benefit of a stock. They try to estimate the effects it has on factors such as the environment, health and happiness. Then, they use their own methods of expressing those effects in dollar amounts.
The net benefit of a share divided by the investment required to carry out that share produces the social return on investment. The report gives evaluators insight into the value of an investment so they can decide how to prioritize various policies. They can also assess whether the public will be willing to financially support a project.
Next, policy makers must decide what to do with information about the social return on investment. They may implement various strategies to identify the parties who benefit from the action and involve them in paying the cost. For example, if the government wants to build a new road, it can decide to make it a toll road. This identifies the people who benefit from the new road as they are the only ones who use it to pay the toll, and collecting money from them involves them paying for the costs of building and maintaining the road. Such a policy avoids charging taxpayers who do not use a road the cost of maintaining it.
Not all examples are so clear. Identifying the people who benefit from city beautification projects, for example, is difficult, as is quantifying the benefits they receive. In such cases, researchers can use surveys or proxy data, such as changes in property value, to estimate the benefits of an action.
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