Benefit-cost (B/C) analysis must take into account the distributional effects from a policy or program change. To highlight this, we focus on the theory of production quota buyouts within a B/C framework. As an empirical application, we provide evidence on the distributional effects of the U.S. government buyout of the peanut program in 2002, where production quotas were key ingredients. Two approaches to producer compensation under the buyout are discussed: (1) value of quota approach and (2) gains from quota approach. In the peanut quota program buyout, the U.S. government chose the value of quota approach. Both consumers and producers were made better off as a result of the buyout, and there was a net gain in efficiency. If the government had chosen the gains from quota approach instead, government expenditures and producer gains would have been lower, and consumer benefits would have remained unchanged. Under either approach, the B/C ratios calculated for the government quota buyout are almost identical.

Over the past two decades, federal and state policymakers have dramatically reshaped the nation’s system of cash welfare assistance for low-income families. During this period, there has been considerable variation from state to state in approaches to welfare reform, which are often collectively referred to as “welfare-to-work programs.” This article synthesizes an extraordinary body of evidence: results from 28 benefit-cost studies of welfare-to-work programs based on random assignment evaluation designs. Each of the 28 programs can be viewed as a test of one of six types of welfare reform approaches: mandatory work experience programs, mandatory job-search-first programs, mandatory education-first programs, mandatory mixed-initial-activity programs, earnings supplement programs, and time-limit-mix programs. After describing how benefit-cost studies of welfare-to-work programs are conducted and considering some limitations of these studies, the synthesis addresses such questions as: Which welfare reform program approaches yield a positive return on investments made, from the perspective of program participants and from the perspective of government budgets, and the perspective of society as a whole? Which approaches make program participants better off financially? In which approaches do benefits exceed costs from the government’s point of view? The last two of these questions coincide with the trade-off between reducing dependency on government benefits and ensuring adequate incomes for low-income families. Because the benefit-cost studies examined program effects from the distinct perspectives of government budgets and participants’ incomes separately, they address this trade-off directly. The article thus uses benefit-cost findings to aid in assessing the often complex trade-offs associated with balancing the desire to ensure the poor of adequate incomes and yet encourage self-sufficiency.

Cost-benefit analysis in the United States for policy and legal purposes traditionally has been highly parochial, excluding not just losses or gains of welfare to non-U.S. residents from a given policy but also excluding any losses or gains in welfare U.S. residents would experience as a result of impacts to foreigners and foreign settlements. In the climate change context, this approach has meant that cost-benefit analyses for the costs of unmitigated climate change to the United States value at zero the losses that U.S. residents will bear as a result of the direct, adverse impacts of climate change to foreign lives and settlements. This article argues that there are sound theoretical reasons to include such welfare losses in a cost-benefit analysis, and that doing so requires going beyond revealed preference data to consider stated preference surveys. The article presents the findings of internet-based surveys that strongly suggest that the implicit assumption of the current approach to cost-benefit analysis in the United States—that U.S. residents value foreign lives and settlements that may be destroyed by climate change at zero—is untenable.

Benefit-cost analysis is required for many regulatory decisions in the United States and in other countries. In this paper, I examine a standard textbook model that is used in benefit-cost analysis as it is actually applied to environmental policy and other areas of regulation. My primary objective is to suggest how including some key factors in the analysis could promote the development of smarter regulation.I begin by presenting a standard economic model for government intervention in markets, which balances benefits and a narrow definition of costs. I then introduce a richer normative theory that considers several political and economic costs that are frequently not considered in analyzing real-world applications. Examples include costs associated with rent seeking, design and implementation, and raising revenues. The richer theory suggests that the government should supply less of a good, or ask the private sector to provide less of that good, than the standard economic model suggests. The reason is that intervening in markets is often more costly than the standard model assumes. In special cases, the theory provides guidance on the setting of socially optimal taxes and subsidies. I then explore how the theory needs to be modified in the presence of biased estimates of benefits and costs. I conclude with a discussion of how the theoretical framework can be applied to the actual design of regulatory policy.

Benefit-cost analysis (BCA) provides a framework for systematically assessing the efficiency of public policies. Increasingly, BCA is being applied to social policies, ranging from preschool interventions to prison reentry programs. These applications offer great potential for helping to identify policies that offer the best returns on public investments aimed at helping the disadvantaged or otherwise improving social life. However, applying BCA to social policies pose a number of challenges. The need for a comprehensive approach to assessing social policies generally requires making predictions based on data from multiple sources and using available shadow prices. As these predictions and shadow prices are inherently uncertain, special effort must be made to explicitly address the resulting uncertainty of predictions of net benefits. Prediction and valuation are complicated by behaviors, such as addiction, that do not clearly satisfy the assumptions of neoclassical welfare economics. As distributional goals are often an explicit motivation for social policies, BCA may be an incomplete framework for public policy purposes unless analysts can find ways to incorporate people's willingness to pay for changes in the distribution of consumption across society. If BCA is to reach its potential for contributing to good social policy, analysts must be aware of these challenges and researchers must help address them.

It is often useful to convert nominal values to real values for applied welfare analysis. This article discusses the use of price deflators, and several published economic indices that may be useful for this process.