Ten Principles of Cost-Benefit Analysis and Five Barriers to Its Wider Use

This paper lays out 10 important principles of cost-benefit analysis (CBA) and also five barriers to its wider use, particularly ones related to potential adjustments to individuals’ valuations of impacts, recognizing that CBA is an aid, not necessarily an input, to public policy decision making. The principles are: (i) CBA assesses allocative efficiency, not social welfare. (ii) CBA is based on methodological individualism. (iii) Individuals act approximately rationally in a neoclassical sense, with some important exceptions. (iv) Property right allocations are normally exogenous to CBA. (v) All individuals are equal, based on positive or negative impacts of policy. (vi) Aggregate willingness-to-pay (WTP) or willingness-to-accept (WTA) primarily determines social surplus. (vii) Individuals value present consumption more than the same unit of future consumption. (viii) CBA follows a “no-envy” rule in estimating surplus. (ix) The nation is the default boundary for spatial standing but subnational jurisdictions with constitutional authority may also have legitimacy. (x) A constitutional-contractarianist principle can also justify expansion of spatial scope to supranational contexts. This paper addresses five barriers to wider use of CBA as a policy decision-making aid. There are three measurement problems that justify adjustments: lack of plausible monetary estimates, the legitimacy or not of aggregating heterogeneous preferences and discrepancies between WTP and WTA valuations for the same good. There are two more serious problems: discordance between the neoclassical and behavioral economics view of the overall efficacy of individual choice in some circumstances and the presence of physiological addiction.