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Scitovsky Reversals and Practical Benefit-Cost Analysis

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  • Just, Richard E.
  • Schmitz, Andrew
  • Zerbe, Richard O.

Abstract

The possibility of preference reversals according to the Kaldor-Hicks (KH) criterion in benefit-cost analysis has concerned economists since Scitovsky (1941) first published his results. Lawyers and philosophers have argued that the potential of reversals calls the use of benefit-cost analysis into question, implying elimination of its use. We demonstrate that reversals occur only with inferior goods in the case of static production possibilities and that reversals occur under changing production possibilities only when production possibilities frontiers cross, which is a myopic characterization that ignores practical cases of global production possibilities.

Suggested Citation

  • 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.
    • Handle: RePEc:cup:jbcoan:v:3:y:2012:i:02:p:1-12_00
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    References listed on IDEAS

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    1. 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.
    2. Richard O. Zerbe Jr & Allen S. Bellas, 2006. "A Primer for Benefit–Cost Analysis," Books, Edward Elgar Publishing, number 3480.
    3. Coate, Stephen, 2000. "An Efficiency Approach to the Evaluation of Policy Changes," Economic Journal, Royal Economic Society, vol. 110(463), pages 437-455, April.
    4. Richard O. Zerbe & Howard E. McCurdy, 1999. "The failure of market failure," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 18(4), pages 558-578.
    5. Charles Blackorby & David Donaldson, 1990. "A Review Article: The Case against the Use of the Sum of Compensating Variations in Cost-Benefit Analysis," Canadian Journal of Economics, Canadian Economics Association, vol. 23(3), pages 471-494, August.
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    1. Just Richard E. & Schmitz Andrew & Zerbe Richard O., 2013. "Scitovsky reversals in benefit-cost analysis with normal goods," Journal of Benefit-Cost Analysis, De Gruyter, vol. 4(3), pages 411-413, December.

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