Distributionally Sensitive Cost-Benefit Analysis

Robin Boadway and Michael Smart

No 11692, CESifo Working Paper Series from CESifo

Abstract: We propose a method for cost-benefit analysis of public policies that identifies potential Pareto improvements when losers from a reform are compensated through income tax changes. Reforms are desirable when they decrease aggregate excess burden in commodity and labor markets. This condition is equivalent to a weighted sum of individual compensating variations, where weights reflect the impacts of the policy reform on individuals’ labor incomes, rather than marginal social valuations of transfers to them. We identify cases in which distributional weights are increasing in individual incomes, in spite of inequality concerns.

Keywords: applied welfare economics; weighted surplus; excess burden (search for similar items in EconPapers)
JEL-codes: D60 H20 H40 I30 (search for similar items in EconPapers)
Date: 2025
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