IDEAS home Printed from https://ideas.repec.org/p/pra/mprapa/121294.html
   My bibliography  Save this paper

A foundation for benefit-cost analysis

Author

Listed:
  • Zerbe, Richard

Abstract

This paper considers the evolution of cost-benefit analysis, CBA, and proposes a foundation for its current use and continued development, to be called benefit-cost analysis, BCA. In the trajectory from CBA to BCA elements of a new foundation include first a recognition that there is a Pareto justification for its use, not just a potential Pareto or KH justification. The Pareto justification applies to the whole use of BCA, rather than, as with KH, to individual projects. Second, the BCA recognizes, to a greater extent than CBA, its reliance on law to determine rights and reference points from which BCA determines gains or losses. Thus, in considering the role of law, the gain-loss disparity is recognized by BCA as is the role of law in determining rights. Third, BCA recognizes behavioral economics essentially unknown to CBA. Fourth, the proposed foundation for BCA recognizes that illegal goods or actions are not to be given standing so that the value of stolen goods to the criminal is zero, except in cases in which the very illegality of the law itself is at issue. Fifth, BCA recognizes from a theoretical viewpoint that moral and ethical sentiments should, aside from data limitations, be treated as other goods for which there is a willingness to pay or to accept. This applies to both utility weights relying on declining marginal utility with income and to equity weights relying on WTP or WTA measures. Six, BCA recognizes that actual compensation can improve welfare. Seventh, I suggest that a discount rate that combines the use of both the social rate of time preference and the opportunity cost of capital constitutes an appropriate discounting procedure. Seventh, the suggested foundation for BCA will reduce many existing criticisms of CBA.

Suggested Citation

  • Zerbe, Richard, 2023. "A foundation for benefit-cost analysis," MPRA Paper 121294, University Library of Munich, Germany, revised Jun 2024.
  • Handle: RePEc:pra:mprapa:121294
    as

    Download full text from publisher

    File URL: https://mpra.ub.uni-muenchen.de/121294/1/MPRA_paper_121294.pdf
    File Function: original version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Zerbe, Richard O., 2020. "The Consent Justification for Benefit–Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 11(2), pages 319-340, July.
    2. Dale Whittington & Duncan Macrae, 1990. "Comment: Judgments about who has standing in cost-benefit analysis," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 9(4), pages 536-547.
    3. Just, Richard E. & Schmitz, Andrew & Zerbe, Richard O., 2013. "Scitovsky reversals in benefit-cost analysis with normal goods," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 4(3), pages 411-413, December.
    4. Shogren, Jason F. & Seung Y. Shin & Dermot J. Hayes & James B. Kliebenstein, 1994. "Resolving Differences in Willingness to Pay and Willingness to Accept," American Economic Review, American Economic Association, vol. 84(1), pages 255-270, March.
    5. Knetsch, Jack L., 2020. "Behavioural Economics, Benefit-Cost Analysis, and the WTP versus WTA Choice," International Review of Environmental and Resource Economics, now publishers, vol. 14(2-3), pages 153-196, October.
    6. Just, Richard E. & Schmitz, Andrew & Zerbe, Richard O., 2012. "Scitovsky Reversals and Practical Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 3(2), pages 1-12, May.
    7. Burgess, David F. & Zerbe, Richard O., 2011. "Calculating the Social Opportunity Cost Discount Rate," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(3), pages 1-10, August.
    8. Stephen A. Marglin, 1963. "The Opportunity Costs of Public Investment," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 77(2), pages 274-289.
    9. Schmitz Andrew & Zerbe Richard O., 2008. "Scitovsky Reversals and Efficiency Criteria in Policy Analysis," Journal of Agricultural & Food Industrial Organization, De Gruyter, vol. 6(2), pages 1-20, December.
    10. Nussbaum, Martha C, 2000. "The Costs of Tragedy: Some Moral Limits of Cost-Benefit Analysis," The Journal of Legal Studies, University of Chicago Press, vol. 29(2), pages 1005-1036, June.
    11. Acland, Daniel J. & Greenberg, David H., 2023. "Distributional weighting and welfare/equity tradeoffs: a new approach," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 14(1), pages 68-92, March.
    12. Burgess David F. & Zerbe Richard O, 2011. "Calculating the Social Opportunity Cost Discount Rate," Journal of Benefit-Cost Analysis, De Gruyter, vol. 2(3), pages 1-10, August.
    13. William N. Trumbull, 1990. "Who has standing in cost-benefit analysis?," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 9(2), pages 201-218.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richard O. Zerbe, 2013. "Ethical benefit–cost analysis as art and science: ten rules for benefit–cost analysis," Chapters, in: Scott O. Farrow & Richard Zerbe, Jr. (ed.), Principles and Standards for Benefit–Cost Analysis, chapter 8, pages 264-293, Edward Elgar Publishing.
    2. Dale Whittington & Richard T. Carson & Thomas Sterner, 2023. "Policy Note: Benefit Cost Analysis of Water Investments in the Anthropocene," Water Economics and Policy (WEP), World Scientific Publishing Co. Pte. Ltd., vol. 9(03), pages 1-23, July.
    3. Campbell, Harry F. & Brown, Richard P.C., 2005. "A multiple account framework for cost-benefit analysis," Evaluation and Program Planning, Elsevier, vol. 28(1), pages 23-32.
    4. Nayga, Rodolfo M., Jr. & Aiew, Wipon & Woodward, Richard T., 2004. "Willingness to Pay for Irradiated Food: A Non Hypothetical Market Experiment," 84th Seminar, February 8-11, 2004, Zeist, The Netherlands 24995, European Association of Agricultural Economists.
    5. Englmaier, Florian & Schmöller, Arno & Stowasser, Till, 2013. "Price Discontinuities in an online used Car Market," VfS Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79982, Verein für Socialpolitik / German Economic Association.
    6. John List & Jason Shogren, 1998. "The Deadweight Loss from Christmas: Comment," Artefactual Field Experiments 00531, The Field Experiments Website.
    7. Richard G. Newell & William A. Pizer & Brian C. Prest, 2024. "The Shadow Price of Capital: Accounting for Capital Displacement in Benefit-Cost Analysis," Environmental and Energy Policy and the Economy, University of Chicago Press, vol. 5(1), pages 49-69.
    8. Liangdong Lu & Mengyao Wang & Jia Xu, 2023. "How to Keep Investors’ Confidence after Being Labeled as Polluting Firms: The Role of External Political Ties and Internal Green Innovation Capabilities," Sustainability, MDPI, vol. 15(17), pages 1-19, September.
    9. William A. Masters & Diakalia Sanogo, 2002. "Welfare Gains from Quality Certification of Infant Foods: Results from a Market Experiment in Mali," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 84(4), pages 974-989.
    10. Just, Richard E. & Schmitz, Andrew & Zerbe, Richard O., 2012. "Scitovsky Reversals and Practical Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 3(2), pages 1-12, May.
    11. Huffman, Wallace & Rousu, M. & Shogren, Jason F. & Tegene, Abebayehu, 1009. "Are U.S. Consumers Tolerant of GM Foods?," Staff General Research Papers Archive 12336, Iowa State University, Department of Economics.
    12. Xue, Hong & Mainville, Denise Y. & You, Wen & Nayga, Rodolfo M., Jr., 2009. "Nutrition Knowledge, Sensory Characteristics and Consumers’ Willingness to Pay for Pasture-Fed Beef," 2009 Annual Meeting, July 26-28, 2009, Milwaukee, Wisconsin 49277, Agricultural and Applied Economics Association.
    13. Li, Qingran & Pizer, William A., 2021. "Use of the consumption discount rate for public policy over the distant future," Journal of Environmental Economics and Management, Elsevier, vol. 107(C).
    14. Nicolas Jacquemet & Stephane Luchini & Jason Shogren & Verity Watson, 2019. "Discrete Choice under Oaths," Post-Print halshs-02136103, HAL.
    15. Florian Englmaier & Arno Schmöller, 2008. "Reserve Price Formation in Online Auctions," CESifo Working Paper Series 2374, CESifo.
    16. Dragicevic, Arnaud Z. & Ettinger, David, 2011. "Private Valuation of a Public Good in Three Auction Mechanisms," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 2(2), pages 1-29, April.
    17. Oben K Bayrak & Bengt Kriström, 2016. "Is there a valuation gap? The case of interval valuations," Economics Bulletin, AccessEcon, vol. 36(1), pages 218-236.
    18. Burgess, David F., 2013. "Reconciling alternative views about the appropriate social discount rate," Journal of Public Economics, Elsevier, vol. 97(C), pages 9-17.
    19. Emmanuel Flachaire & Guillaume Hollard & Jason Shogren, 2013. "On the origin of the WTA–WTP divergence in public good valuation," Theory and Decision, Springer, vol. 74(3), pages 431-437, March.
    20. Gökçe Esenduran & James A. Hill & In Joon Noh, 2020. "Understanding the Choice of Online Resale Channel for Used Electronics," Production and Operations Management, Production and Operations Management Society, vol. 29(5), pages 1188-1211, May.

    More about this item

    Keywords

    cost-benefit analysis; transition; history; moral sentiments; equity; immoral sentiments; discount rate; criticisms;
    All these keywords.

    JEL classification:

    • D6 - Microeconomics - - Welfare Economics
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D63 - Microeconomics - - Welfare Economics - - - Equity, Justice, Inequality, and Other Normative Criteria and Measurement
    • K0 - Law and Economics - - General
    • N0 - Economic History - - General
    • N01 - Economic History - - General - - - Development of the Discipline: Historiographical; Sources and Methods
    • N20 - Economic History - - Financial Markets and Institutions - - - General, International, or Comparative

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:pra:mprapa:121294. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Joachim Winter (email available below). General contact details of provider: https://edirc.repec.org/data/vfmunde.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.