Scitovsky Reversals and Practical Benefit-Cost Analysis

Richard Just, Andrew Schmitz and Richard O. Zerbe

Journal of Benefit-Cost Analysis, 2012, vol. 3, issue 2, 1-12

Abstract: The possibility of preference reversals according to the Kaldor-Hicks (KH) criterion in benefit-cost analysis has concerned economists since Scitovsky (1941) first published his results. Lawyers and philosophers have argued that the potential of reversals calls the use of benefit-cost analysis into question, implying elimination of its use. We demonstrate that reversals occur only with inferior goods in the case of static production possibilities and that reversals occur under changing production possibilities only when production possibilities frontiers cross, which is a myopic characterization that ignores practical cases of global production possibilities.

Date: 2012
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