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Distributional Weights in Cost-Benefit Analysis—Should We Forget about Them?

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  • Olof Johansson-Stenman

Abstract

Many argue that it is socially inefficient to use distributional weights in cost-benefit analysis, and that doing so implies large inefficiency losses,when distributional matters can be dealt with trough income taxation, instead. Our results question this view, by showing a large range of cases when distributional weights are (second-best) optimal to use. One example is when different provided goods affect tax-revenues equally per dollar spent; utility functions that are separable in the provided goods is sufficient for this. Most results hold for linear and non-linear income taxes and whether they are optimal or not. General policy implications are discussed.

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  • Olof Johansson-Stenman, 2005. "Distributional Weights in Cost-Benefit Analysis—Should We Forget about Them?," Land Economics, University of Wisconsin Press, vol. 81(3).
    • Handle: RePEc:uwp:landec:v:81:y:2005:i:3:p337-352
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    Cited by:

    1. Anthoff, David & Hepburn, Cameron & Tol, Richard S.J., 2009. "Equity weighting and the marginal damage costs of climate change," Ecological Economics, Elsevier, vol. 68(3), pages 836-849, January.
    2. Athanasios Kampas & Richard Horan, 2016. "Second-best pollution taxes: revisited and revised," Environmental Economics and Policy Studies, Springer;Society for Environmental Economics and Policy Studies - SEEPS, vol. 18(4), pages 577-597, October.
    3. Rintaro Yamaguchi, 2019. "Intergenerational Discounting with Intragenerational Inequality in Consumption and the Environment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 73(4), pages 957-972, August.
    4. Adler, Matthew & Treich, Nicolas, 2014. "Consumption, Risk and Prioritarianism," TSE Working Papers 14-500, Toulouse School of Economics (TSE).
    5. Lea S. Svenningsen & Bo Jellesmark Thorsen, 2020. "Preferences for Distributional Impacts of Climate Policy," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 75(1), pages 1-24, January.
    6. Adler, Matthew D. & Treich, Nicolas, 2017. "Utilitarianism, prioritarianism, and intergenerational equity: A cake eating model," Mathematical Social Sciences, Elsevier, vol. 87(C), pages 94-102.
    7. Anthoff, David & Tol, Richard S.J., 2010. "On international equity weights and national decision making on climate change," Journal of Environmental Economics and Management, Elsevier, vol. 60(1), pages 14-20, July.
    8. Nyborg, Karine, 2014. "Project evaluation with democratic decision-making: What does cost–benefit analysis really measure?," Ecological Economics, Elsevier, vol. 106(C), pages 124-131.
    9. Kverndokk, Snorre & Rose, Adam, 2008. "Equity and Justice in Global Warming Policy," International Review of Environmental and Resource Economics, now publishers, vol. 2(2), pages 135-176, October.
    10. Shyam KC, 2013. "Cost Benefit Studies on Disaster Risk Reduction in Developing Countries," World Bank Other Operational Studies 16111, The World Bank.
    11. Glenn Jenkins & Chun-Yan Kuo & Arnold C. Harberger, 2011. "Cost-Benefit Analysis for Investment Decisions: Chapter 14 (The Shadow Price of Government Funds, Distributional Weights, and Basic Needs Externalitiess)," Development Discussion Papers 2011-14, JDI Executive Programs.
    12. Paul Watkiss & Federica Cimato, 2016. "The economics of adaptation and climate-resilient development: lessons from projects for key adaptation challenges," GRI Working Papers 235, Grantham Research Institute on Climate Change and the Environment.
    13. Yamaguchi, Rintaro, 2012. "Discounting, Distribution and Disaggregation," MPRA Paper 46322, University Library of Munich, Germany.
    14. Väinö Nurmi & Karoliina Pilli-Sihvola & Hilppa Gregow & Adriaan Perrels, 2019. "Overadaptation to Climate Change? The Case of the 2013 Finnish Electricity Market Act," Economics of Disasters and Climate Change, Springer, vol. 3(2), pages 161-190, July.
    15. Rintaro Yamaguchi, 2013. "Discounting, Distribution and Disaggregation: Discount Rates for the Rich and the Poor with Climate as a Source of Utility," Scottish Journal of Political Economy, Scottish Economic Society, vol. 60(4), pages 440-459, September.
    16. Nurmi, Väinö & Ahtiainen, Heini, 2018. "Distributional Weights in Environmental Valuation and Cost-benefit Analysis: Theory and Practice," Ecological Economics, Elsevier, vol. 150(C), pages 217-228.
    17. Karel Martens, 2011. "Substance precedes methodology: on cost–benefit analysis and equity," Transportation, Springer, vol. 38(6), pages 959-974, November.
    18. Scarborough, Helen & Bennett, Jeff, 2008. "Estimating intergenerational distribution preferences," Ecological Economics, Elsevier, vol. 66(4), pages 575-583, July.
    19. Udo Ebert, 2007. "Redistributional Preference in Environmental Policy," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 63(4), pages 548-562, December.
    20. Flügel, Stefan, 2014. "Accounting for user type and mode effects on the value of travel time savings in project appraisal: Opportunities and challenges," Research in Transportation Economics, Elsevier, vol. 47(C), pages 50-60.
    21. 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.
    22. Nahmias–Biran, Bat-hen & Shiftan, Yoram, 2016. "Towards a more equitable distribution of resources: Using activity-based models and subjective well-being measures in transport project evaluation," Transportation Research Part A: Policy and Practice, Elsevier, vol. 94(C), pages 672-684.
    23. Jasper N. Meya & Stefan Baumgärtner & Moritz A. Drupp & Martin F. Quaas, 2020. "Inequality and the Value of Public Natural Capital," CESifo Working Paper Series 8752, CESifo.
    24. Anna Brink & Katarina Nordblom & Roger Wahlberg, 2007. "Maximum fee versus child benefit: a welfare analysis of Swedish child-care fee reform," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 14(4), pages 457-480, August.

    More about this item

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H21 - Public Economics - - Taxation, Subsidies, and Revenue - - - Efficiency; Optimal Taxation

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