Cost Benefit Analysis + discounting

Atkinson et al., 2018

CBA used because = model of rationality (avoiding lexical thinking), clear that a policy should be one of a series of options, accounts for time , individual preferences count, explicit rather than implicit preferences

recent developments

• finding money values - correspondence problem, use and non-use values

• who gains, who loses - some argue should ‘maximise the cake’ others argue for equity and fairness

• selecting discount rate - tyranny of discounting, contemporary discussion on declining discount rates versus constant discount rate, emerging interest in dual discounting (different rates for different commodities)

• limits of CBA -

Randall, 2014

discomfort with welfarist foundation of CBA

• narrow view of human well-being - reduces to what people want and how much do they want it

• sum of everyone’s preferences = treated all preferences as commensurable, ignores distribution, privileges preferences of the wealthy

welfarist assumes preferences and WTP reveals welfare

Arrow et al., 1997

most economists argue economic efficiency (benefits minus costs) should be the fundamental criteria for evaluation

inherent problem in measuring marginal benefits and costs

concerns about fairness - merit consideration

appropriate use of CBA

• comparison of favourable and unfavourable effects

• remove statutory prohibitions of balancing B and C

• requires for all major regulatory decisions

• B and C for proposed policies should be quantified wherever possible

• external review

• core economic assumptions used - social discount rate, value of reducing premature deaths

• good analysis will identify distributional consequences

Chichilnisky, 1997

CBA dangerous if taken literally on large issues and large timescales - difficult to price these issues

reliability of prices? - usually come from markets but environmental assets have no market price

error in price = radically change results

discounting is not necessary or sufficient for efficiency and intergenerational equity

global warming alerts to weaknesses of CBA in dealing with global long-term problems

should use sustainable CBA not discounting

Ramsey, 1920s

‘discounting is ethically indefensible and arises from a failure of the imagination”

Ray, 1997

CBA is necessary for sensible policy

policies which re and for economic efficiency are often also bad for the environment and vice versa

‘shadow’ price of commodity - should reflect environmental effects

have to integrate distributional concerns into analysis systematically

Lewis and Tietenberg, 2020