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Scitovsky Reversals and Efficiency Criteria in Policy Analysis

Author

Listed:
  • Schmitz Andrew

    (University of Florida)

  • Zerbe Richard O.

    (University of Washington)

Abstract

Lawyers and philosophers have used the Scitovsky paradox to discredit cost-benefit analyses. His paradox is used as a criticism of the potential compensation criterion. But the occurrence of reversals is severely limited. The Compensation Principle, even with its potential nature, requires that compensation actually could be paid. Based on many empirical cost-benefit studies, the actual cost of compensation, which includes transaction costs, can be large. The attempt at actual compensation could turn a highly desirable project into a highly undesirable one, as the benefit-cost ratio could change from greater than one to less than one. The proper justification for using BCA is the Pareto principle considered across a portfolio of projects not the Compensation Principle.

Suggested Citation

  • 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.
    • Handle: RePEc:bpj:bjafio:v:6:y:2008:i:2:n:3
    DOI: 10.2202/1542-0485.1235
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    References listed on IDEAS

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    1. Richard O. Zerbe, 2001. "Economic Efficiency in Law and Economics," Books, Edward Elgar Publishing, number 1992.
    2. Currie, John Martin & Murphy, John A & Schmitz, Andrew, 1971. "The Concept of Economic Surplus and its Use in Economic Analysis," Economic Journal, Royal Economic Society, vol. 81(324), pages 741-799, December.
    3. Zvi Griliches, 1958. "Research Costs and Social Returns: Hybrid Corn and Related Innovations," Journal of Political Economy, University of Chicago Press, vol. 66(5), pages 419-419.
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    Cited by:

    1. Just Richard E. & Schmitz Andrew & Zerbe Richard O., 2012. "Scitovsky Reversals and Practical Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, De Gruyter, vol. 3(2), pages 1-12, May.

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