2.8 The third step is to carry out an option appraisal. This is often the most significant part of the analysis. Initially a wide range of options should be created and reviewed. This helps to set the parameters of an appropriate solution. A shortlist may then be created to keep the process manageable, by applying the techniques summarised below to high level estimates or summary data. The 'do minimum' option should always be carried forward in the shortlist, to act as a check against more interventionist action.
2.9 Each option is then appraised by establishing a Base Case1. This is the best estimate of its costs and benefits. These estimates can then be adjusted by considering different scenarios, or the option's sensitivity to changes can be modelled by changing key variables. More fully, the appraisal may develop as follows:
❑ Identify and value the costs of each option.
❑ Identify and value the benefits of each option.
❑ If required, adjust the valued costs and benefits for:
❑ Distributional impacts (the effects of proposals on different sections of society);
❑ Relative price movements.
❑ Adjust for the timing of the incidence of costs and benefits by discounting them, to obtain their present values.
❑ If necessary, adjust for material differences in tax between options.
❑ Adjust for risk and optimism to provide the Base Case, and consider the impacts of changes in key variables and of different future scenarios on the Base Case.
❑ Consider unvalued impacts (both costs and benefits), using weighting and scoring techniques if appropriate.
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1 The term 'Base Case' is sometimes used to refer to the 'do minimum' option, but it is not used in this way in the Green Book.