Illustration of a Method to Incorporate Preference Uncertainty in Benefit–Cost Analysis

Sunhee Baik, Alexander L. Davis and M. Granger Morgan

Risk Analysis, 2019, vol. 39, issue 11, 2359-2368

Abstract: Benefit–cost analysis is widely used to evaluate alternative courses of action that are designed to achieve policy objectives. Although many analyses take uncertainty into account, they typically only consider uncertainty about cost estimates and physical states of the world, whereas uncertainty about individual preferences, thus the benefit of policy intervention, is ignored. Here, we propose a strategy to integrate individual uncertainty about preferences into benefit–cost analysis using societal preference intervals, which are ranges of values over which it is unclear whether society as a whole should accept or reject an option. To illustrate the method, we use preferences for implementing a smart grid technology to sustain critical electricity demand during a 24‐hour regional power blackout on a hot summer weekend. Preferences were elicited from a convenience sample of residents in Allegheny County, Pennsylvania. This illustrative example shows that uncertainty in individual preferences, when aggregated to form societal preference intervals, can substantially change society's decision. We conclude with a discussion of where preference uncertainty comes from, how it might be reduced, and why incorporating unresolved preference uncertainty into benefit–cost analyses can be important.

Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:wly:riskan:v:39:y:2019:i:11:p:2359-2368

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