One is now in a position to distinguish between three levels of analysis relevant to the evaluation of public sector projects:(1)analysis at market prices — financial profitability;(2)analysis at efficiency prices — economic profitability;(3)analysis at social prices — social profitability. The early chapters of this book have covered the essential concepts and tools required for the analysis of financial profitability. In particular, elementary notions of discounted cash flow and investment decision rules have been discussed, as have basic accounting conventions necessary for understanding what elements are properly included in cost and revenue flows. Elements of statistical theory have been included to clarify the principles involved in predicting costs and revenues. These constitute the essential foundation upon which, so to speak, it is now possible to erect a more elaborate superstructure. The present chapter and the two chapters which follow are concerned with the second of the above headings, the analysis of economic profitability.
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