Positive versus Normative Justifications for Benefit-Cost Analysis: Implications for Interpretation and Policy

What is the rationale for benefit-cost analysis (BCA)? The answer is critical for determining how BCA should be conducted and interpreted, and identifying its implications for policy. This article examines two possible justifications for BCA: positive and normative. The positive rationale is that BCA identifies policy changes whereby those who benefit could, in theory, compensate those who are harmed. The normative rationale is that BCA identifies social improvements (e.g., by approximating a utilitarian calculus or protecting against cognitive error in policy choice). The standard approach to BCA assumes that the positive and normative justifications coincide. However, when human behavior differs from what is assumed in standard economic models, these justifications may conflict. In this case, individuals may dislike a change in circumstances that economic models predict they should prefer. The positive justification for BCA is consistent with respect for individual autonomy and provides clarity about methodological choices in the analysis (i.e., that the objective is to incorporate people's apparent preferences as accurately as possible), but it may also require accepting cognitive and behavioral errors that individuals would wish to avoid. The normative justification implies rejecting policies that the population may prefer and requires determining what preferences are normatively acceptable. The article argues that the choice of justification is part of a larger issue concerning the appropriate role of representative government. (JEL: D61, D81, H40, Q50) Copyright 2013, Oxford University Press.