At the heart of any public investment decision is this basic question—does the planned investment lead to a net increase in social welfare?
Cost-benefit analysis (CBA) is now the government-preferred approach to evaluating policy choices (Office of Best Practice Regulation, 2005). A cost-benefit approach is required to identify the real and opportunity costs associated with expenditure, as well as the benefits that flow, including economic impacts, preferences and avoided costs.
Within the cost-benefit approach, avoided cost theory, as it is applied here, assumes that any positive change in public welfare enabled by live music is a benefit that would otherwise need to be met by the community in order to maintain the status quo. Cost benefit analysis is not, however, a static valuation technique. It is a comprehensive means of comparing one alternative to another, and therein lays its limitations for the purpose of stand-alone valuation.
Foremost, this study is concerned with estimating the value of live music making in Australia. This value is defined here to be the sum of benefits enabled over a fixed period—in this case, one year. Net value (benefits less costs) is only relevant to the extent that it allows demonstration of the process of how value is created, and to make observations about allocative efficiency.
As a result, the substitutability of the costs and benefits is less material than it would be in traditional cost-benefit analysis. This is because this study is not overtly comparing live music with anything, even if the use of the value arrived at as a basis for future comparison is not precluded. In valuing live music, this study is only measuring the gross contribution to the community. The hypothetical presumption that other events might fill the void left by no live music in Australia should not alter our understanding of its value at the point in time in which it is measured. After all, valuation is not a zero sum game.
The impact of time, too, becomes largely moot. As this study intends to value live music making in Australia only on the basis of 2014 performances, there is no need to speculate on the return that the community might achieve in future years. This is counter-intuitive to the theories of both price and cost-benefit analysis, which are highly sensitive to prospective cash flows and the psychological baggage that comes with them.
Nonetheless, this does not give licence to be casual with estimates and, if anything, imposes a higher standard of rigour, especially in regard to the risk of over-estimation. A conservative position is therefore adopted by tending, where necessary, to overestimate costs and underestimate benefits.
The other refinement made here to the cost-benefit approach is the offer of a more complete illustration of the value creation process. This is because the notion of value is relational, in that the meaning and activity of creating value emerges from a complex set of interconnected social relations (Ollman, 1976). Any study of value should therefore focus on the process by which value is created and ascribed (B. K. Johnson, Mondello, & Whitehead, 2007).
The cost-benefit approach also demands particular attention to identification of the recipients of benefits and the bearers of costs. In developing and applying a framework for a complete economic assessment of the value of an activity, it is therefore necessary to quantify the costs and benefits to:
- government at all levels
- users, and
- the community, environment and society.
Iterations of this model have been successfully applied to economy-wide valuations of public goods such as sport and physical recreation, volunteering, the Arts, and major events; and has been subject to academic peer-review (Muller, Cameron, Jameson, Robertson, & Grafton, 2013; Muller, Harvey, Arthur, & McMahon, 2014).
The intention of this process is to divert attention from market economics to social economics. While social economists have developed rigorous methodologies for articulating value—the most accepted of which is contingent valuation—what practitioners have lacked up until now is a theoretical paradigm to consistently locate and describe the costs and benefits of any given activity (or ecology thereof).