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What is Social Return on Investment?

Danielle DeLee
Danielle DeLee

Social return on investment is a concept of investment returns that attempts to encapsulate the effects an individual action has on the world. It includes environmental effects and consequences for people who are not directly involved in the action. Often, these effects are not easy to measure, but economists try to come up with methods for quantifying social return. By quantifying the costs and benefits of actions, economists and policymakers hope to encourage people and organizations to take their places in the world into account.

The idea of social return on investment is closely related to the concept of externalities. Suppose that your next-door neighbor decides to plant a garden. She weighs the cost of the plants and how much work planting them is against the enjoyment she expects to receive. You also get to look at the flowers, however, so she is underestimating the benefits of planting the garden. If she decides against planting it, she may be making an inefficient choice, because your enjoyment could tip the cost-benefit analysis to the positive side.

Man climbing a rope
Man climbing a rope

In this example, your enjoyment of the garden is a positive externality because it is a benefit the person making the decision does not take into account. The socially efficient outcome will only happen if you and your neighbor coordinate, so that you play a part in supporting her gardening project. This is what policymakers who use social return on investment are trying to accomplish.

To determine the social return on investment, evaluators must first measure the net benefit of an action. They try to estimate the effects it has on factors like the environment, health and happiness. Then, they use their own methods to express those effects in dollar amounts.

The net benefit of an action divided by the investment required to realize that action yields the social return on investment. The ratio gives evaluators an idea of the value of an investment so they can decide how to prioritize various policies. They can also gauge whether the public will be willing to support a project financially.

Next, policymakers must decide what to do with the information about the social return on investment. They may implement various strategies to identify the parties that benefit from the action and involve them in paying for its cost. For example, if the government wants to build a new road, it can decide to make it a toll road. This identifies the people who benefit from the new road since they are the only ones who drive on it to pay the toll, and collecting money from them involves them in paying for the cost of building and maintaining the road. Such a policy avoids charging taxpayers who do not use a road for the cost of maintaining it.

Not all examples are as clear-cut. Identifying the people who benefit from city beautification projects, for example, is difficult, as is quantifying the benefits they receive. In such cases, researchers may use surveys or proxy data, like changes in property value, to estimate an action’s benefits.

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