Scitovsky Reversals and Efficiency Criteria in Policy Analysis

Andrew Schmitz and Richard O. Zerbe
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Andrew Schmitz: University of Florida
Richard O. Zerbe: University of Washington

Journal of Agricultural & Food Industrial Organization, 2008, vol. 6, issue 2, pages 3

Abstract:

Lawyers and philosophers have used the Scitovsky paradox to discredit cost-benefit analyses. His paradox is used as a criticism of the potential compensation criterion. But the occurrence of reversals is severely limited. The Compensation Principle, even with its potential nature, requires that compensation actually could be paid. Based on many empirical cost-benefit studies, the actual cost of compensation, which includes transaction costs, can be large. The attempt at actual compensation could turn a highly desirable project into a highly undesirable one, as the benefit-cost ratio could change from greater than one to less than one. The proper justification for using BCA is the Pareto principle considered across a portfolio of projects not the Compensation Principle.

Keywords: reversals; technology; welfare gains (search for similar items in EconPapers)
Date: 2008
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