To make sound investment decisions, it is strategically critical to first establish a clear economic criterion. Without a defined goal, the selection process can become subjective, leading to the inefficient allocation of scarce public resources. A formal criterion provides a consistent, objective standard for measuring all proposals, ensuring they are judged on their ability to create public value. Based on the nature of a project’s constraints, one of three primary criteria should be applied:

• For Fixed Budgets (Fixed Input): In situations where a specific, unchangeable amount of capital is allocated, the guiding criterion is to maximize the public benefits and other outputs achieved for that fixed investment. This applies, for example, to paving as many city streets as possible with a voter-approved $5 million bond.
• For Mandated Outcomes (Fixed Output): When a specific public service or facility is required, the proper criterion is to minimize the costs and other inputs needed to deliver that mandated outcome. This is the correct approach for building a new bridge to meet a federal safety mandate at the lowest possible cost.
• For General Projects (Neither Fixed): For the most common scenario, where neither the budget nor the specific outcomes are fixed, the most robust criterion is to select the project that maximizes the net difference between public benefits and public costs. This standard would be used when evaluating multiple proposals—from a small bridge repair to a major new highway interchange—to determine which project offers the biggest improvement in traffic flow for the money.

The third criterion is the most powerful and generally applicable standard for evaluating public works. It moves beyond simply asking if a project’s benefits exceed its costs; it pushes decision-makers to identify and select the single alternative that creates the greatest possible societal surplus. Adhering to this principle is the cornerstone of a fiscally sound policy that directs public capital toward projects generating the highest value for every dollar spent. Applying this criterion effectively, however, requires a formal and transparent evaluation process.