Working paper

Accounting for the distribution of benefits & costs in benefit-cost analysis

James K. Hammitt

Abstract

Benefit-cost analysis (BCA) is often viewed as measuring the efficiency of a policy independent of the distribution of its consequences. The role of distributional effects on policy choice is disputed; either: (a) the policy that maximize net benefits should be selected and distributional concerns should be addressed through other measures, such as tax and transfer programs, or (b) BCA should be supplemented with distributional analysis and decision makers should weigh efficiency and distribution in policy choice. The separation of efficiency and distribution is misleading. The measure of efficiency depends on the numéraire chosen for the analysis, whether monetary values or some other good (unless individuals have the same rates of substitution between them). The choice of numéraire is not neutral; it can affect the ranking of policies by calculated net benefits. Alternative evaluation methods, such as BCA using a different numéraire, weighted BCA, or a social welfare function, may better integrate concerns about distribution and efficiency. The most appropriate numéraire, distributional weights, or social welfare function cannot be measured or statistically estimated; it is a normative choice.

Keywords

distributional weights; numéraire; social welfare function;

Reference

James K. Hammitt, Accounting for the distribution of benefits & costs in benefit-cost analysis, TSE Working Paper, n. 20-1116, June 2020.

See also

Published in

TSE Working Paper, n. 20-1116, June 2020