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Editor's Choice Benefit–Cost Analysis and Distributional Weights: An Overview

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  • Matthew D. Adler

Abstract

Benefit–cost analysis (BCA) evaluates policy choices by summing unweighted monetary equivalents, and is insensitive to distributional considerations. An established scholarly tradition proposes to use distributional weights in BCA—multiplying monetary equivalents by weighting factors that are inversely proportional to individuals’ incomes. This article provides an accessible overview of the topic of distributional weights, with a special focus on environmental policy. The intellectual foundation for weights is the concept of a social welfare function (SWF). Two are considered: a utilitarian SWF and an isoelastic/Atkinson SWF, which incorporates an extra degree of inequality aversion. The article explains the concept of an SWF, discusses in detail how to specify utilitarian and isoelastic/Atkinson weights so as to mimic the corresponding SWFs, and uses the value of statistical life (VSL) to provide an example of weighting. The article then considers two important objections to distributional weighting: that interpersonal well-being comparisons (and thus weights) are undermined by preference heterogeneity, and that distributional considerations are best handled through the tax system.

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  • Matthew D. Adler, 2016. "Editor's Choice Benefit–Cost Analysis and Distributional Weights: An Overview," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 264-285.
    • Handle: RePEc:oup:renvpo:v:10:y:2016:i:2:p:264-285.
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    2. Hammitt, James K., 2020. "Accounting for the distribution of benefits & costs in benefit-cost analysis," TSE Working Papers 20-1116, Toulouse School of Economics (TSE).
    3. Jamil, Muhammad Hamza & Ullah, Kafait & Saleem, Noor & Abbas, Faisal & Khalid, Hassan Abdullah, 2022. "Did the restructuring of the electricity generation sector increase social welfare in Pakistan?," Renewable and Sustainable Energy Reviews, Elsevier, vol. 157(C).
    4. Vito Frontuto & Silvana Dalmazzone & Francesco Salcuni & Alessandro Pezzoli, 2020. "Risk Aversion, Inequality and Economic Evaluation of Flood Damages: A Case Study in Ecuador," Sustainability, MDPI, vol. 12(23), pages 1-17, December.
    5. Moritz A. Drupp & Ulrike Kornek & Jasper N. Meya & Lutz Sager, 2021. "Inequality and the Environment: The Economics of a Two-Headed Hydra," CESifo Working Paper Series 9447, CESifo.
    6. Knoke, Thomas & Gosling, Elizabeth & Paul, Carola, 2020. "Use and misuse of the net present value in environmental studies," Ecological Economics, Elsevier, vol. 174(C).
    7. Marc Fleurbaey & Rossi Abi-Rafeh, 2016. "The Use of Distributional Weights in Benefit–Cost Analysis: Insights from Welfare Economics," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 286-307.
    8. Richard Cookson & Ieva Skarda & Owen Cotton‐Barratt & Matthew Adler & Miqdad Asaria & Toby Ord, 2021. "Quality adjusted life years based on health and consumption: A summary wellbeing measure for cross‐sectoral economic evaluation," Health Economics, John Wiley & Sons, Ltd., vol. 30(1), pages 70-85, January.
    9. Hammitt, James K., 2022. "Prevention, Treatment, and Palliative Care: The Relative Value of Health Improvements under Alternative Evaluation Frameworks," TSE Working Papers 22-1339, Toulouse School of Economics (TSE).
    10. Hammitt, James K., 2022. "Prevention, treatment, and palliative care: The relative value of health improvements under alternative evaluation frameworks," Journal of Health Economics, Elsevier, vol. 84(C).
    11. Adler, Matthew, 2020. "What should we spend to save lives in a pandemic? A critique of the value of statistical life," LSE Research Online Documents on Economics 105283, London School of Economics and Political Science, LSE Library.

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