A foundation for benefit-cost analysis

This paper considers the evolution of cost-benefit analysis, CBA, and proposes a foundation for its current use and continued development, to be called benefit-cost analysis, BCA. In the trajectory from CBA to BCA elements of a new foundation include first a recognition that there is a Pareto justification for its use, not just a potential Pareto or KH justification. The Pareto justification applies to the whole use of BCA, rather than, as with KH, to individual projects. Second, the BCA recognizes, to a greater extent than CBA, its reliance on law to determine rights and reference points from which BCA determines gains or losses. Thus, in considering the role of law, the gain-loss disparity is recognized by BCA as is the role of law in determining rights. Third, BCA recognizes behavioral economics essentially unknown to CBA. Fourth, the proposed foundation for BCA recognizes that illegal goods or actions are not to be given standing so that the value of stolen goods to the criminal is zero, except in cases in which the very illegality of the law itself is at issue. Fifth, BCA recognizes from a theoretical viewpoint that moral and ethical sentiments should, aside from data limitations, be treated as other goods for which there is a willingness to pay or to accept. This applies to both utility weights relying on declining marginal utility with income and to equity weights relying on WTP or WTA measures. Six, BCA recognizes that actual compensation can improve welfare. Seventh, I suggest that a discount rate that combines the use of both the social rate of time preference and the opportunity cost of capital constitutes an appropriate discounting procedure. Seventh, the suggested foundation for BCA will reduce many existing criticisms of CBA.