Government expenditures equal cost?
As a practical matter the most obvious and natural way to measure the value of the resources used by a project is simply the direct budgetary outlay needed to purchase the resources. To determine when budgetary outlays should and should not be used as the measure of costs, the conceptually appropriate measure of costs is compared with the direct budgetary outlay measure of costs in three situations:
When the market for a resource is efficient and purchases of the resource for the project will have a negligible effect on the price of the resource, budgetary expenditures usually accurately measure project opportunity costs Because most factors have neither steeply rising nor declining marginal cost curves, it is often reasonable to presume that expenditures on project inputs are equal to their social cost.
When the market for the resource is efficient, but purchases for the project will have a noticeable effect on prices, budgetary outlays often only slightly overstate project opportunity costs. If prices do go up substantially, however, budgetary costs need to be adjusted for CBA purposes. Using a linear approximation the amount of this adjustment can be calculated as the amount of the factor purchased for the project, q' multiplied by ½(P1 - P0).
When the market for the resource is inefficient (i.e., there is a market failure), expenditures may substantially overstate or understate project opportunity costs.