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Distributionally Sensitive Cost-Benefit Analysis

Author

Listed:
  • Robin Boadway
  • Michael Smart

Abstract

We propose a method for cost-benefit analysis of public policies that identifies potential Pareto improvements when losers from a reform are compensated through income tax changes. Reforms are desirable when they decrease aggregate excess burden in commodity and labor markets. This condition is equivalent to a weighted sum of individual compensating variations, where weights reflect the impacts of the policy reform on individuals’ labor incomes, rather than marginal social valuations of transfers to them. We identify cases in which distributional weights are increasing in individual incomes, in spite of inequality concerns.

Suggested Citation

  • Robin Boadway & Michael Smart, 2025. "Distributionally Sensitive Cost-Benefit Analysis," CESifo Working Paper Series 11692, CESifo.
    • Handle: RePEc:ces:ceswps:_11692
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    File URL: https://www.cesifo.org/DocDL/cesifo1_wp11692.pdf
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    References listed on IDEAS

    as
    1. Laroque, Guy R., 2005. "Indirect taxation is superfluous under separability and taste homogeneity: a simple proof," Economics Letters, Elsevier, vol. 87(1), pages 141-144, April.
    2. repec:bla:scandj:v:81:y:1979:i:2:p:264-84 is not listed on IDEAS
    3. Hunt Allcott & Benjamin B Lockwood & Dmitry Taubinsky, 2019. "Regressive Sin Taxes, with an Application to the Optimal Soda Tax," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1557-1626.
    4. Boadway, Robin & Cuff, Katherine, 2022. "A generalization of the Deaton-Hellwig results on uniform commodity taxation," Journal of Public Economics, Elsevier, vol. 214(C).
    5. Konishi, Hideo, 1995. "A Pareto-improving commodity tax reform under a smooth nonlinear income tax," Journal of Public Economics, Elsevier, vol. 56(3), pages 413-446, March.
    6. Coate, Stephen, 2000. "An Efficiency Approach to the Evaluation of Policy Changes," Economic Journal, Royal Economic Society, vol. 110(463), pages 437-455, April.
    7. Shavell, Steven, 1981. "A Note on Efficiency vs. Distributional Equity in Legal Rulemaking: Should Distributional Equity Matter Given Optimal Income Taxation?," American Economic Review, American Economic Association, vol. 71(2), pages 414-418, May.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    applied welfare economics; weighted surplus; excess burden;
    All these keywords.

    JEL classification:

    • D60 - Microeconomics - - Welfare Economics - - - General
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • H40 - Public Economics - - Publicly Provided Goods - - - General
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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