One outcome of the existence of social capital in a community is that individuals will take into consideration the welfare of other members of the community. If an investment project is undertaken that causes the poorer members of society to increase their consumption of goods and services to improve the satisfaction of their basic needs, then other members of the community who are not directly affected by the project may also experience an increase in the level of their economic welfare. This approach takes into consideration both the change in the economic welfare of the recipients of the assistance provided to enhance the satisfaction of basic needs in the community, but also takes into consideration the tastes and preferences of the rest of the community, some who might be subsidizing this activity.

This basic needs externality can be created by investments because the project lowers the price of a good or service used to satisfy their basic needs, or by raising the incomes of the poor groups so that they now will buy more of the goods that are used to satisfy their basic needs.

This paper develops a theoretical framework for the evaluation of the basic needs externality created by the investment. It then applies this theoretical framework to the case of a project that proposes to expand the water supply in the south part of the city of Manila. We find that these externalities can be quite important. In this particular case a conservative evaluation of the basic needs externality leads to a value that is over 4 times as large as the financial shortfall of the project.