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The Uncertainty Problem in Cost-Benefit Analysis Expanded: A Current Review

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  • Derek Linton

Abstract

This article examines the current state of cost-benefit analysis and its limitations. The review was completed by looking at current literature of cost-benefit analysis with the most up to date developments. Currently, it faces known challenges in quantifying subjective human elements, incommensurable costs and benefits, difficulty in measuring and discounting future benefits and costs, and the potential lack of impartiality in regulatory settings. However, this article uniquely addresses a paradox in the analysis process itself related to the discovery of new information. Methods to mitigate risk and uncertainty, such as sensitivity analysis, Monte Carlo simulations, and scenario analysis, are analyzed. Additionally, quasi-option value is addressed as it relates the discovery of new information. Despite these approaches to mitigate uncertainty, uncertainty remains a fundamental challenge in achieving true optimality through cost-benefit analysis. However, it is found that despite the paradox identified in this article, it can still be a useful tool in evaluating decision alternatives.

Suggested Citation

  • Derek Linton, 2024. "The Uncertainty Problem in Cost-Benefit Analysis Expanded: A Current Review," Journal of Economic Impact, Science Impact Publishers, vol. 6(1), pages 21-26.
    • Handle: RePEc:adx:journl:v:6:y:2024:i:1:p:21-26
    DOI: 10.52223/econimpact.2024.6103
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    References listed on IDEAS

    as
    1. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Frank, Robert H, 2000. "Why Is Cost-Benefit Analysis So Controversial?," The Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 913-930, June.
    3. repec:pri:cepsud:91malkiel is not listed on IDEAS
    4. Sen, Amartya, 2000. "The Discipline of Cost-Benefit Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 931-952, June.
    5. Sen, Amartya Kumar, 2000. "The Discipline of Cost†Benefit Analysis," Scholarly Articles 3444801, Harvard University Department of Economics.
    6. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Journal of Economic Perspectives, American Economic Association, vol. 17(1), pages 59-82, Winter.
    7. Burton G. Malkiel, 2003. "The Efficient Market Hypothesis and Its Critics," Working Papers 111, Princeton University, Department of Economics, Center for Economic Policy Studies..
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