Hostname: page-component-78c5997874-lj6df Total loading time: 0 Render date: 2024-11-10T14:18:13.208Z Has data issue: false hasContentIssue false
  • English
  • Français

Accounting for the Distribution of Benefits and Costs in Benefit–Cost Analysis

Published online by Cambridge University Press:  17 December 2020

James K. Hammitt
James K. Hammitt*
Affiliation:
Center for Risk Analysis & Center for Health Decision Science, Harvard University, Boston, MA, USA; Toulouse School of Economics, Université Toulouse Capitole, Toulouse, France, e-mail: jkh@harvard.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Benefit–cost analysis (BCA) is often viewed as measuring the efficiency of a policy independent of the distribution of its consequences. The role of distributional effects on policy choice is disputed; either: (a) the policy that maximizes net benefits should be selected and distributional concerns should be addressed through other measures, such as tax and transfer programs or (b) BCA should be supplemented with distributional analysis and decision-makers should weigh efficiency and distribution in policy choice. The separation of efficiency and distribution is misleading. The measure of efficiency depends on the numéraire chosen for the analysis, whether monetary values or some other good (unless individuals have the same rates of substitution between them). The choice of numéraire is not neutral; it can affect the ranking of policies by calculated net benefits. Alternative evaluation methods, such as BCA using a different numéraire, weighted BCA, or a social welfare function (SWF), may better integrate concerns about distribution and efficiency. The most appropriate numéraire, distributional weights, or SWFs cannot be measured or statistically estimated; it is a normative choice.

Keywords

distributional weightsnumérairesocial welfare functionA13D30D61D63H40I31
Type
Symposium: Papers from the 2019 European Meeting of the Society for Benefit-Cost Analysis
Information
Journal of Benefit-Cost Analysis , Volume 12 , Issue 1 , Spring 2021 , pp. 64 - 84
Copyright
© The Author(s), 2020. Published by Cambridge University Press on behalf of the Society for Benefit-Cost Analysis

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

Adler, M. D. 2016. “Benefit–Cost Analysis and Distributional Weights: An Overview.” Review of Environmental Economics and Policy, 10: 264–285.CrossRefGoogle Scholar
Adler, M. D. 2019. Measuring Social Welfare: An Introduction. Oxford: Oxford University Press.CrossRefGoogle Scholar
Arrow, K. J., Cropper, M. L., Gollier, C., Groom, B., Heal, G. M., Newell, R. G., et al. 2014. “Should Governments Use a Declining Discount Rate in Project Analysis?” Review of Environmental Economics and Policy, 8: 145–163.CrossRefGoogle Scholar
Brekke, K. A. 1997. “The Numéraire Matters in Cost-Benefit Analysis.” Journal of Public Economics, 64: 117–123.CrossRefGoogle Scholar
Brekke, K. A. 1998. “Reply to J. Drèze and P.-O. Johansson.” Journal of Public Economics, 70: 495–496.Google Scholar
Broome, J. 1978. “Trying to Value a Life.” Journal of Public Economics, 9: 91–100.CrossRefGoogle Scholar
Canning, D. 2013. “Axiomatic Foundations for Cost-Effectiveness Analysis.” Health Economics, 22: 1405–1416.CrossRefGoogle ScholarPubMed
Clinton, W. J. 1993. “Regulatory Planning and Review, Executive Order 12866 of September 30, 1993.” Federal Register, 58(190).Google Scholar
Deaton, A. 2014. The Great Escape: Health, Wealth, and the Origins of Inequality. Princeton: Princeton University Press.Google Scholar
Drèze, J. 1998. “Distribution Matters in Cost-Benefit Analysis.” Journal of Public Economics, 70: 485–488.Google Scholar
Drèze, J. and Stern, N.. 1987. “The Theory of Cost-Benefit Analysis.” In Auerbach, A. J. and Feldstein, M. (Eds.) Handbook of Public Economics, Vol. II, 909–989. Amsterdam: Elsevier Science Publishers.CrossRefGoogle Scholar
Ellerman, D. 2009. “Numeraire Illusion: The Final Demise of the Kaldor–Hicks Principle.” In Theoretical Foundations of Law and Economics, edited by White, M. D., 96–118, Cambridge: Cambridge University Press.Google Scholar
Ellerman, D. 2014. “On a Fallacy in the Kaldor–Hicks Efficiency–Equity Analysis.” Constitutional Political Economy, 25: 125–136.CrossRefGoogle Scholar
European Commission, Directorate-General for Regional and Urban Policy. 2015. Guide to Cost-Benefit Analysis of Investment Projects: Economic appraisal tool for Cohesion Policy 2014–2020. European Union, Brussels.Google Scholar
Fleurbaey, M. and Abi-Rafeh, R.. 2016. “The Use of Distributional Weights in Benefit–Cost Analysis: Insights from Welfare Economics.” Review of Environmental Economics and Policy, 10: 286–307.CrossRefGoogle Scholar
Florio, M. 2014. Applied Welfare Economics: Cost-Benefit Analysis of Projects and Policies. Routledge: Abingdon, Oxon, Milton Park.CrossRefGoogle Scholar
Graham, J.D. 2008. “Saving Lives through Administrative Law and Economics.” University of Pennsylvania Law Review, 157: 395–540.Google Scholar
Hammitt, J. K., Morfeld, P., Tuomisto, J. T, and Erren, T. C.. 2020. “Premature Deaths and Statistical Lives: Identification, Quantification, and Valuation of Mortality Risks.” Risk Analysis, 40: 674–695.CrossRefGoogle ScholarPubMed
Hammitt, J. K. and Treich, N.. 2007. “Statistical vs. Identified Lives in Benefit-Cost Analysis.” Journal of Risk and Uncertainty, 35: 45–66.CrossRefGoogle Scholar
Hammond, P. 1981. “Ex Ante and Ex Post Welfare Optimality Under Uncertainty.” Economica, 48: 235–250.CrossRefGoogle Scholar
Harberger, A. C. 1978. “On the Use of Distributional Weights in Social Cost-Benefit Analysis.” Journal of Political Economy, 86: S87–S120.CrossRefGoogle Scholar
Harberger, A. C. 1980. “On the Use of Distributional Weights in Social Cost-Benefit Analysis: Reply to Layard and Squire.” Journal of Political Economy, 88: 1050–1052.CrossRefGoogle Scholar
Harris, R. and Olewiler, N.. 1979. “The Welfare Economics of Ex Post Optimality.” Economica, 46: 137–147.CrossRefGoogle Scholar
Heinzerling, L. 2000. “The Rights of Statistical People.” Harvard Environmental Law Review, 24: 189–207.Google Scholar
HM Treasury 2018. The Green Book: Central Government Guidance on Appraisal and Evaluation. London.Google Scholar
Hylland, A. and Zeckhauser, R.. 1979. “Distributional Objectives Should Affect Taxes but not Program Choice or Design.” Scandinavian Journal of Economics, 81: 264–284.CrossRefGoogle Scholar
Johansson, P.-O. 1998. “Does the Choice of Numéraire Matter in Cost-Benefit Analysis?” Journal of Public Economics, 70: 489–493.Google Scholar
Kaplow, L. 1996. “The Optimal Supply of Public Goods and the Distortionary Cost of Taxation.” National Tax Journal, 49: 513–533.CrossRefGoogle Scholar
Kaplow, L. 2004. “On the (Ir)relevance of Distribution and Labor Supply Distortion to Government Policy.” Journal of Economic Perspectives, 18: 159–175.CrossRefGoogle Scholar
Milne, F., and Shefrin, H. M.. 1988. “Ex Post Efficiency and Ex Post Welfare: Some Fundamental Considerations.” Economica, 55: 63–79.CrossRefGoogle Scholar
Mishan, E. J. 1969. Welfare Economics: An Assessment. Amsterdam: North-Holland.Google Scholar
Neumann, P. J., Sander, G. D., Russell, L. B., Siegel, J. E., and Ganiats, T. G., eds. 2016. Cost-Effectiveness in Health and Medicine, 2nd ed. Oxford: Oxford University Press.CrossRefGoogle Scholar
Nozick, R. 1974. Anarchy, State, and Utopia. New York: Basic Books.Google Scholar
Nyborg, K. 2012. The Ethics and Politics of Environmental Cost-Benefit Analysis. Routledge: Abingdon, Oxon, Milton Park.CrossRefGoogle Scholar
OMB. 2003. Circular A-4: Regulatory Analysis. Washington, DC: U.S. Office of Management and Budget.Google Scholar
Piketty, T. 2014. Capital in the 21st Century (Le Capital au XXIe siècle). Éditions du Seuil, Paris, 2013. Cambridge: Harvard University Press.Google Scholar
Posner, R. A. 1979. “Utilitarianism, Economics, and Legal Theory.” Journal of Legal Studies, 8: 103–140.CrossRefGoogle Scholar
Robinson, L. A. 2007. “How US Government Agencies Value Mortality Risk Reductions.” Review of Environmental Economics and Policy, 1: 283–299.CrossRefGoogle Scholar
Robinson, L. A., Hammitt, J. K., and Zeckhauser, R. J.. 2016. “Attention to Distribution in U.S. Regulatory Analyses.” Review of Environmental Economics and Policy, 10: 308–328.CrossRefGoogle Scholar
Starr, R. 1973. “Optimal Production and Allocation Under Uncertainty.” Quarterly Journal of Economics, 87: 81–95.CrossRefGoogle Scholar
Stinnett, A. A. and Mullahy, J.. 1998. “Net Health Benefits: A New Framework for the Analysis of Uncertainty in Cost-Effectiveness Analysis.” Medical Decision Making, 18: S68–S80.CrossRefGoogle ScholarPubMed
Ulph, A. 1982. “The Role of Ex Ante and Ex Post Decisions in the Valuation of Life.” Journal of Public Economics, 18: 265–276.CrossRefGoogle Scholar
Viscusi, W. K. 2009. “The Devaluation of Life.” Regulation and Governance, 3: 103–127.CrossRefGoogle Scholar
Weisbrod, B. 1968. “Income Redistribution Effects and Benefit-Cost Analysis.” In Problems in Public Expenditure Analysis, edited by Chase, S. B., 177–209. Washington, DC: Brookings Institution.Google Scholar
Zerbe, R. O. Jr., Davis, T. B., Garland, N., and , T.. 2013. “Conclusion: Principles and Standards for Benefit–Cost Analysis.” In Farrow, S. and Zerbe, R. O. Jr (Eds.) Principles and Standards for Benefit–Cost Analysis, Chapter 11. Cheltenham: Edward Elgar.CrossRefGoogle Scholar