In part I of this book we considered ways of measuring improvements in social welfare brought about by increases in the quantity of goods and services available for consumption. Much of the analysis was concerned with the responses of producers and consumers to the price changes caused by perturbations in the economic system. Not much attention was paid, however, to the source of these perturbations. In part II, we alter the focus of our discussion and ask what projects should be undertaken and, specifically, what criteria should be used to determine whether the introduction of a particular project or policy will be welfare improving. The analysis will be conducted within the same framework as that of part I: we shall continue to assume that individual consumers and private sector producers respond in an optimising manner to changes in the economic environment and, where appropriate, we shall use a general equilibrium framework for our analysis. We shall also continue to assume that an improvement in economic welfare can be identified with an increase in social welfare, defined in terms of the utility of the individuals who make up society.

This overview chapter opens with a short description in section 5.1 of the background to the theory and practice of project appraisal in developing countries. This topic is related in section 5.2 to the general discussion of welfare economics in part I of the book; the distinction between private and social approaches to investment appraisal is discussed in section 5.3 and in section 5.4 the concepts of shadow prices and government control variables are introduced.