Externalities, Information Costs, and Social Benefit-Cost Analysis for Economic Development: An Example from Telecommunications

The analytics of achieving a socially optimal allocation of investment resources has been a continuing problem in the field of economic development. Early work on this subject focused on externalities and on the need to include in the analysis a project's "indirect" promotional effects.' Later research in what came to be called social benefit-cost analysis (SBCA) has added an emphasis on shadow prices, on uncertainty, and, increasingly, on income distribution effects.2 In principle, these diverse concerns of social benefit-cost analysis are complementary rather than competitive. In the conditions of a less developed country (LDC), an investment project's side effects on income creation can be very significant.3 Similarly, an investment project's indirect impact on income distribution may also be substantial. Consequently, an analysis incorporating externalities is necessary to take indirect social benefits and costs into account. In practice, however, the more recent concerns of SBCA have sometimes been accompanied by diminished interest in externalities.4 This paper presents an example that illustrates the importance of including externalities in considering both the efficiency and the equity consequences of investment choice. Our example analyzes the welfare effects of investment in telecommunications (primarily telephone) facilities in developing countries.5 Investments that make available additional telephones in LDCs are often viewed as having welfare effects similar to increased availability of consumer durables like color television or air conditioning. Those goods are primarily an added convenience for the upper classes, and their availability enlarges further the