Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
Hostname: page-component-cd9895bd7-jn8rn Total loading time: 0 Render date: 2024-12-26T19:57:57.193Z Has data issue: false hasContentIssue false
Series:   Elements in Public Economics

Cost–Benefit Analysis

Published online by Cambridge University Press:  24 May 2018

Per-Olov Johansson  and
Bengt Kriström
Per-Olov Johansson
Affiliation:
Stockholm School of Economics

Summary

This Element on cost-benefit analysis provides a summary of recent theoretical and empirical developments and summarizes state-of-the-art stated-preference and revealed-preference valuation methods. The Element discusses how to assess small (or marginal) as well as large (or non-marginal) projects that have a significant impact on prices and/or other economic variables. It also discusses distortions like taxes, market power, and sticky prices. In addition, risk/uncertainty is considered. A novel feature is the elaboration on flexible evaluation rules for reasonably small projects. Conventional point-estimates of projects should be used with care, because they typically give biased results.
Get access

Keywords

Cost–Benefit AnalysisFlexible valuation rulesPublic goodsValue of statistical lifeRisk
Type
Element
Information
Series: Elements in Public Economics
Online ISBN: 9781108660624
Publisher: Cambridge University Press
Print publication: 24 May 2018

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

References

Arrow, K. J., Cropper, M. L., Gollier, C., et al. (2014). Should governments use a declining discount rate in project analysis? Review of Environmental Economics and Policy, 8, 145–163.CrossRefGoogle Scholar
Arrow, K. J., Cropper, M. L., Gollier, C., et al. (2012). How should benefits and costs be discounted in an intergenerational context? Resources for the Future Discussion Paper 12–53, Washington, DC, www.rff.org/RFF/Documents/RFF-DP-12–53.pdf.Google Scholar
Arrow, K. J., & Fisher, A. C. (1974). Environmental preservation, uncertainty, and irreversibility. Quarterly Journal of Economics, 88, 312–319.Google Scholar
Arrow, K., Solow, R., Portney, P. R., et al. (1993). Report of the NOAA Panel on contingent valuation. Federal Register, 58, 4601–4614.Google Scholar
Ayer, M., Brunk, H. D., Ewing, G. M., Reid, W. T., & Silverman, E. (1955). An empirical distribution function for sampling with incomplete information. The Annals of Mathematical Statistics, 26, 641–647.CrossRefGoogle Scholar
Ballard, C. L., & Fullerton, D. (1992). Distortionary taxation and the provision of public goods. Journal of Economic Perspectives, 6, 117–131.Google Scholar
Barro, R. J., & Grossman, H. I. (1976). Money, Employment and Inflation, Cambridge: Cambridge University Press.Google Scholar
Becker, G. S. (1960). An economic analysis of fertility. In Roberts, G. B., ed., Demographic and Economic Change in Developed Countries, Princeton, NJ: Princeton University Press, pp. 209–240.Google Scholar
Belyaev, Y., & Kriström, B. (2015). Analysis of survey data containing rounded censoring intervals. Informatics and Applications, 9, 2–10.Google Scholar
Blackorby, C., & Donaldson, D. (1990). A review article: The case against the use of the sum of compensating variations in cost–benefit analysis. Canadian Journal of Economics, 23, 471–494.Google Scholar
Blanchard, O. J., & Fisher, S. (1996). Lectures on Macroeconomics, Cambridge, MA: The MIT Press.Google Scholar
Boadway, R. (2017). Second-best theory: Ageing well at sixty. Pacific Economic Review, 22, 249–270.Google Scholar
Boadway, R. (1975). Cost–benefit rules in general equilibrium. Review of Economic Studies, 42, 361–374.CrossRefGoogle Scholar
Boadway, R. W. (1974). The welfare foundations of cost–benefit analysis. Economic Journal, 84, 926–939.Google Scholar
Boadway, R. W., & Bruce, N. (1984). Welfare Economics, Oxford: Basil Blackwell.Google Scholar
Botzen, W. W. J., & van den Bergh, J. C. J. M. 2014. Specifications of social welfare in economic studies of climate policy: Overview of criteria and related policy insights. Environmental and Resource Economics, 58, 1–33.CrossRefGoogle Scholar
Boyle, G., & Irwin, T. (2004). A Primer on Real Options, Wellington: New Zealand Institute for the Study of Competition and Regulation.Google Scholar
Carson, R. T. (2012). Contingent Valuation: A Comprehensive Bibliography and History, Cheltenham: Edward Elgar.Google Scholar
Carson, R. T., & Groves, T. (2011). Incentive and information properties of preference questions: Commentary and extensions. In Bennett, J., ed., The International Handbook on Non-Market Environmental Valuation, Northampton, MA: Edward Elgar, pp. 300–321.Google Scholar
Carson, R. T., & Groves, T. (2007). Incentive and informational properties of preference questions. Environmental and Resource Economics, 37, 181–210.CrossRefGoogle Scholar
Chay, K. Y., & Greenstone, M. (2005). Does air quality matter? Evidence from the housing market. Journal of Political Economy, 113, 376–424.CrossRefGoogle Scholar
Coelli, T., Lloyd-Smith, J., Morrison, D., & Thomas, J. (1991). Hedonic pricing for a cost benefit analysis of a public water supply scheme. The Australian Journal of Agricultural Economics, 35, 1–20.Google Scholar
Cuddington, J. T., Johansson, P.-O., & Löfgren, K.-G. (1984). Disequilibrium Macroeconomics in Open Economies, Oxford: Basil Blackwell.Google Scholar
Dahlby, B. (2008). The Marginal Cost of Public Funds. Theory and Applications, Cambridge, MA: The MIT Press.Google Scholar
de Blaeij, A., Florax, R. J. G. M., Rietveld, P., & Verhoef, E. (2003). The value of statistical life in road safety: A meta-analysis. Accident Analysis and Prevention, 35, 973–986.Google Scholar
de Rus, G. (2010). Introduction to Cost–Benefit Analysis. Looking for Reasonable Shortcuts, Cheltenham: Edward Elgar.Google Scholar
Dietz, S., & Hepburn, C. (2013). Benefit–cost analysis of non-marginal climate and energy projects. Energy Economics, 40, 61–71.CrossRefGoogle Scholar
Dixit, A. K., & Pindyck, R. S. (1994). Investment under Uncertainty, Princeton, NJ: Princeton University Press.Google Scholar
Dolan, P., & Tsuchiya, A. (2011). Determining the parameters in social welfare function using stated preference data: An application to health. Applied Economics, 42, 2241–2250.Google Scholar
Drèze, J., & Stern, N. (1987). The Theory of Cost–Benefit Analysis. In Auerbach, A. and Feldstein, M., eds., Handbook in Public Economics, Vol. II, Amsterdam: North-Holland, pp. 909–990.Google Scholar
Dupuit, J. (1849). De l’influence des péages sur l’utilité des voies de communication. Annales des Ponts et Chaussées, 207, 170–248.Google Scholar
Eppen, G. D., Gould, F. J., & Schmidt, C. P. (1993). Introductory Management Science, 4th edn., Englewood Cliffs, NJ: Prentice-Hall International.Google Scholar
European Commission. (2014). Guide to Cost–Benefit Analysis of Investment Projects: Economic Appraisal Tool for Cohesion Policy 2014–2020, Brussels: Tech. rept. DG Regional Policy.Google Scholar
Fisher, A. C., & Hanemann, M. W. (1987). Quasi-option value: Some misconceptions dispelled. Journal of Environmental Economics and Management, 14, 183–190.Google Scholar
Florio, M. (2014). Applied Welfare Economics. Cost–Benefit Analysis of Projects and Policies, New York: Routledge.Google Scholar
Florio, M., Forte, S., & Sirtori, E. (2016). Forecasting the socio-economic impact of the Large Hadron Collider: A cost–benefit analysis to 2025 and beyond. Technological Forecasting and Social Change, 112, 38–53.Google Scholar
Freeman III, A. M., Heriges, J. A., & Kling, C. L. (2014). The Measurement of Environmental and Resource Values. Theories and Methods, 3rd edn., New York: RFF Press.Google Scholar
Gahvari, F. (2006). On the marginal cost of public funds and the optimal provision of public goods. Journal of Public Economics, 90, 1251–1262.CrossRefGoogle Scholar
Gollier, C., & Weitzman, M. L. (2010). How should the distant future be discounted when discount rates are uncertain? Economics Letters, 107, 350–353.Google Scholar
Graham, D. A. (1981). Cost–benefit analysis under uncertainty. American Economic Review, 715–725.Google Scholar
Griliches, Z. (ed.). (1971). Price Indexes and Quality Change, Cambridge, MA: Harvard University Press.Google Scholar
Gustafsson, A., Herrmann, A., & Huber, F. (eds.) (2007). Conjoint Measurement. Methods and Applications, 4th edn., Heidelberg: Springer Verlag.Google Scholar
Harberger, A. C. (1971). Three basic postulates for applied welfare economics: An interpretive essay. Journal of Economic Literature, 9, 785–797.Google Scholar
Harrison, M. (2010). Valuing the future: The social discount rate in cost–benefit analysis. Visiting Researcher Paper, Productivity Commission, Canberra, AUS, http://papers.ssrn.com/sol3/papers.cfm?abstract\id=1599963.Google Scholar
Henry, C. (1974). Investment decisions under uncertainty: The irreversibility effect. American Economic Review, 64, 1006–1012.Google Scholar
Hicks, J. R. (1939). The foundations of welfare economics. The Economic Journal, 49, 696–712.Google Scholar
HM Treasury. (2011). The Green Book. Appraisal and Evaluation in Central Government, London: HMSO.Google Scholar
Hotelling, H. (1949). Letter of June 18, 1947, to Newton B. Drury. Tech. rep., Included in the report The Economics of Public Recreation: An Economic Study of the Monetary Evaluation of Recreation in the National Parks.Google Scholar
Jehle, G. A., & Reny, P. J. (2011). Advanced Microeconomic Theory, 3rd edn., Harlow: Financial Times Prentice Hall.Google Scholar
Johansson, P.-O. (1982). Cost–benefit rules in general disequilibrium. Journal of Public Economics, 18, 121–137.Google Scholar
Johansson, P.-O., & Kriström, B. (2017). General equilibrium welfare evaluation in the small and in the large: Application to green certificate schemes. Mimeo.Google Scholar
Johansson, P.-O., & Kriström, B. (2017a). Rule of half as the outcome of utility maximization. Mimeo.Google Scholar
Johansson, P.-O., & Kriström, B. (2016). Cost–Benefit Analysis for Project Appraisal, Cambridge: Cambridge University Press.Google Scholar
Johansson, P.-O., & Kriström, B. (2015). On the social cost of water-related disasters. Water Economics and Policy, 1 (https://doi.org/10.1142/S2382624X15500150).Google Scholar
Johansson, P. O., & Kriström, B. (2012). The Economics of Evaluating Water Projects. Hydroelectricity versus Other Uses. Heidelberg: Springer Verlag.Google Scholar
Johansson, P.-O., Kriström, B., & Böhringer, C. (2017). General equilibrium welfare evaluation of green certificate schemes in the small. Mimeo.Google Scholar
Johnston, R. J., Boyle, K. J., Ademowicz, W., et al. (2017). Contemporary guidance for stated preference studies. Journal of the Association of Environmental and Resource Economists, 4, 319–405.CrossRefGoogle Scholar
Jorge-Calderón, D., & Johansson, P.-O. (2017). Emissions trading and taxes: An application to airport investment appraisals. Journal of Transport Economics and Policy, 51, 249–265.Google Scholar
Just, R. E., Hueth, D. L., & Schmitz, A. (2004). The Welfare Economics of Public Policy: A Practical Approach to Project and Policy Evaluation, Cheltenham: Edward Elgar.Google Scholar
Kaldor, N. (1939). Welfare propositions of economics and interpersonal comparisons of utility. The Economic Journal, 49, 549–552.Google Scholar
Knight, F. H. (1921). Risk, Uncertainty, and Profit, Boston, MA: Houghton and Mifflin.Google Scholar
Kriström, B., & Johansson, P.-O. (2015). Economic valuation methods for non-market goods or services. In Wohl, E., ed., Oxford Bibliographies in Environmental Science, New York: Oxford University Press. DOI:10.1093/OBO/9780199363445-0044.Google Scholar
Kriström, B., & Laitila, T. (2003). Choice experiments: A user’s guide. In Folmer, H. and Tietenberg, T., eds., Yearbook of Environmental and Resource Economics, Cheltenham: Edward Elgar, pp. 305–330.Google Scholar
Lancaster, K. (1971). Consumer Demand: A New Approach, New York: Columbia University Press.Google Scholar
Lancaster, K. (1966). A new approach to consumer theory. Journal of Political Economy, 74, 132–157.Google Scholar
Lesourne, J. (1975). Cost–Benefit Analysis and Economic Theory, Amsterdam: North-Holland.Google Scholar
Lesourne, J. (1972). Le Calcul Économique: Théorie et Applications, 2nd edn., Paris: Dunod.Google Scholar
Lindhjem, H., Navrud, S., Braathen, N. A., & Biausque, V. (2011). Valuing mortality risk reductions from environmental, transport, and health policies: A global meta-analysis of stated preference studies. Risk Analysis, 31, 1381–1407.Google Scholar
Loureiro, M. L., & Loomis, J. B. (2013). International public preferences and provision of public goods: Assessment of passive use values in large oil spills. Environmental and Resource Economics, 56, 521–534.Google Scholar
Louviere, J. J., Flynn, T. N., & Carson, R. T. (2010). Discrete choice experiments are not conjoint analysis. Journal of Choice Modelling, 3, 57–72.Google Scholar
Luce, R. D., & Tukey, J. W. (1964). Simultaneous conjoint measurement: A new type of fundamental measurement. Journal of Mathematical Psychology, 1, 1–27.Google Scholar
Mahieu, P.-A., Riera, P., Kriström, B., Brännlund, R., & Giergiczny, M. (2014). Exploring the determinants of uncertainty in contingent valuation surveys. Journal of Environmental Economics and Policy, 3, 186–200.Google Scholar
Mäler, K.-G. (2002). Are social welfare functions ordinal or cardinal? Beijer Discussion Paper Series No. 148, Stockholm: The Beijer Institute of Ecological Economics.Google Scholar
Mäler, K.-G. (1985). Welfare Economics and the Environment. In Kneese, A. V. and Sweeney, J. L., eds., Handbook of Natural Resource and Energy Economics, vol. 1, Amsterdam: North-Holland, pp. 3–60.Google Scholar
Mäler, K.-G. (1974). Environmental Economics: A Theoretical Inquiry. Baltimore, MD: Johns Hopkins University Press for Resources for the Future.Google Scholar
McAllister, P. H., Stone, J. C., & Dantzig, G. B. (1989). Deriving a utility function for the U.S. economy. Journal of Policy Modeling, 11, 391–429.Google Scholar
Mensink, P., & Requate, T. (2005). The Dixit–Pindyck and the Arrow–Fisher-Hanemann–Henry option values are not equivalent: A note on Fisher (2000). Resource and Energy Economics, 27, 83–88.Google Scholar
Milgrom, P. (1993). Is sympathy an economic value? Philosophy, economics and the contingent valuation method. In Hausman, J. A., ed., Contingent Valuation: A Critical Assessment, Amsterdam: Elsevier, pp. 417–435.Google Scholar
Myles, G. D. (1995). Public Economics, Cambridge: Cambridge University Press.Google Scholar
Palmquist, R. B. (2005). Weak complementarity, path independence, and the intuition of the Willig condition. Journal of Environmental Economics and Management, 49, 103–115.Google Scholar
Pareto, V. (1896–1897). Premier Cours d’Économie Politique Appliquée Professé à l’Université de Lausanne, Paris: Rouge/Pichon.Google Scholar
Parsons, G. R. (2013). Travel cost methods. In Shogren, J. F., ed., Encyclopedia of Energy, Natural Resource, and Environmental Economics, Amsterdam: Elsevier, pp. 349–358.CrossRefGoogle Scholar
Phelps, E. S., & Pollak, R. A. (1968). On second-best national saving and game-equilibrium growth. Review of Economic Studies, 35, 185–199.CrossRefGoogle Scholar
Quinet, É. (2013). Cost benefit assessment of public investments. Final report. Summary and recommendations. Paris: Commissariat general à la stratégie et à la prospective.Google Scholar
Robinson, L. A., & Hammitt, J. K. (2011). Behavioral economics and the conduct of benefit–cost analysis: Towards principles and standards. Journal of Benefit–Cost Analysis, 2, (2), art. 5.Google Scholar
Rosen, S. (1988). The value of changes in life expectancy. Journal of Risk and Uncertainty, 1, 285–304.Google Scholar
Rosen, S. (1974). Hedonic prices and implicit markets: Product differentiation in pure competition. Journal of Political Economy, 82, 34–55.Google Scholar
Ruiz-Castillo, J. (1987). Potential welfare and the sum of individual compensating or equivalent variations. Journal of Economic Theory, 41, 34–53.Google Scholar
Saez, E., & Stantcheva, S. (2016). Generalized social marginal welfare weights for optimal tax theory. American Economic Review, 106, 24–45.Google Scholar
Smith, V. K. (1991). Household production functions and environmental benefit estimation. In Braden, J. B. and Kolstad, C. D., eds., Measuring the Demand for Environmental Quality, Amsterdam: North-Holland, pp. 41–76.Google Scholar
Smith, V. K., & Moore, E. M. (2010). Behavioral economics and benefit cost analysis. Environmental and Resource Economics, 46, 217–234.Google Scholar
Stern, N. (2007). The Economics of Climate Change. The Stern Review, Cambridge: Cambridge University Press.CrossRefGoogle ScholarPubMed
Stigler, S. M. (1980). Stigler’s law of eponymy. Transactions of the New York Academy of Sciences, 39, 147–157.Google Scholar
Strotz, R. H. (1955–1956). Myopia and Inconsistency in Dynamic Utility Maximization. Review of Economic Studies, 23, 165–180.Google Scholar
Traeger, C. P. (2014). On option values in environmental and resource economics. Resource and Energy Economics, 37, 242–252.Google Scholar
US EPA. (2010). Guidelines for preparing economic analyses. U.S. Environmental Protection Agency (EPA), Updated May 2014, Washington, DC: EPA 240-R–00–003.Google Scholar
Viscusi, W. K. (2015). The heterogeneity of the value of statistical life: Evidence and policy implications. In Mansfield, C. and Smith, V. K., eds., Benefit–Cost Analyses for Security Policies. Does Increased Safety Have to Reduce Efficiency? Cheltenham: Edward Elgar, pp. 78–116.Google Scholar
Weimer, D. L. (2017). Behavioral Economics for Cost–Benefit Analysis. Benefit Validity When Sovereign Consumers Seem to Make Mistakes. Cambridge: Cambridge University Press.Google Scholar
Whittington, D., & MacRae, D. Jr. (1986). The issue of standing in cost–benefit analysis. Journal of Policy Analysis and Management, 5, 665–682.Google Scholar
Yunker, J. A. (1989). Some empirical evidence on the social welfare maximization hypothesis. Public Finance, 44, 110–133.Google Scholar

Acknowledgements

We are grateful to the editors of the Cambridge Elements series in Public Economics, Professors Robin Boadway, Frank Cowell, and Massimo Florio, and the Associate Editor Dr. Chiara Del Bo for their generous support. Two anonymous reviewers provided us with detailed and very constructive comments. However, any remaining errors and other flaws are our own responsibility.

Save element to Kindle

To save this element to your Kindle, first ensure no-reply@cambridge.org is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Cost–Benefit Analysis
Available formats
×

Save element to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Cost–Benefit Analysis
Available formats
×

Save element to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Cost–Benefit Analysis
Available formats
×