Accounting for the Distribution of Benefits and Costs in Benefit–Cost Analysis

James K. Hammitt
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James K. Hammitt: TSE-R - Toulouse School of Economics - UT Capitole - Université Toulouse Capitole - UT - Université de Toulouse - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, Department of Economics, Harvard University - Harvard University

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Abstract: Benefit–cost analysis (BCA) is often viewed as measuring the efficiency of a policy independent of the distribution of its consequences. The role of distributional effects on policy choice is disputed; either: (a) the policy that maximizes net benefits should be selected and distributional concerns should be addressed through other measures, such as tax and transfer programs or (b) BCA should be supplemented with distributional analysis and decision-makers should weigh efficiency and distribution in policy choice. The separation of efficiency and distribution is misleading. The measure of efficiency depends on the numéraire chosen for the analysis, whether monetary values or some other good (unless individuals have the same rates of substitution between them). The choice of numéraire is not neutral; it can affect the ranking of policies by calculated net benefits. Alternative evaluation methods, such as BCA using a different numéraire, weighted BCA, or a social welfare function (SWF), may better integrate concerns about distribution and efficiency. The most appropriate numéraire, distributional weights, or SWFs cannot be measured or statistically estimated; it is a normative choice.

Keywords: Distributional weights; Numeraire; Social welfare function (search for similar items in EconPapers)
Date: 2021-04
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Published in Journal of Benefit-Cost Analysis, 2021, 12 (1), pp.64 - 84. ⟨10.1017/bca.2020.29⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-03531826

DOI: 10.1017/bca.2020.29

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