Social return on investment is a concept that measures the effects of an action on the environment and people not directly involved. Economists quantify costs and benefits to encourage individuals and organizations to consider their impact. It is related to externalities, where positive benefits are not taken into account. Evaluators measure net benefits and express them in dollar amounts to determine the value of an investment. Policymakers use this information to identify parties that benefit and involve them in paying the cost.
Social return on investment is a concept of return on investment that attempts to encapsulate the effects that an individual action has on the world. It includes environmental effects and consequences for people not directly involved in the action. Often these effects are not easy to measure, but economists try to find ways to quantify the social return. By quantifying the costs and benefits of actions, economists and policymakers hope to encourage people and organizations to consider their places in the world.
The idea of social return on investment is closely related to the concept of externalities. Suppose your next-door neighbor decides to plant a garden. She weighs the cost of the plants and the amount of work to plant them against the enjoyment she expects to receive. However, you can also look at the flowers, so she is underestimating the benefits of planting the garden. If she decides not to plant it, she may be making an inefficient choice, because her enjoyment of it could 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 decision maker does not take into account. The socially efficient outcome will only happen if you and your neighbor coordinate, so that you participate in supporting your garden project. This is what policymakers 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 like the environment, health, and happiness. Then they use their own methods to express those effects in dollar amounts.
The net profit of a stock divided by the investment required to realize that the stock produces the social return on investment. The ratio gives evaluators an idea of 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 support a project financially.
Next, policy makers must decide what to do with the information on the social return on investment. They can implement various strategies to identify the parties that benefit from the action and involve them in paying its cost. For example, if the government wants to build a new road, it may decide to make it a toll road. This identifies the people who benefit from the new road, since they are the only ones driving on it to pay the toll, and charging them money means they pay the cost of building and maintaining the road. Such a policy avoids charging taxpayers who do not use a road for the cost of maintaining it.
Not all examples are so clear cut. Identifying the people who benefit from city beautification projects, for example, is difficult, as is quantifying the benefits they receive. In such cases, researchers may use surveys or proxy data, such as property value changes, to estimate the benefits of an action.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
