The shaky foundation of benefit-cost analysis

A post by Tim Brennan at RFF on the uncertain foundations of benefit-cost analysis. (Another RFF post explores the question of whether policies should influence preferences.) The bottom line: that we can’t rely on a cut-and-dried economic analysis to define the “most efficient” policy action.

His conclusion is that we need to turn back to policymakers to decide, rather than relying on the “high priests” of economists:

The best alternative may be to use a fair and open democratic process to choose those who would change (or ignore) revealed preferences. This sounds more radical than it is; we do it all the time. We elect officials who directly or indirectly make choices according to noneconomic values based on ethical rights or distributive justice. Moreover, we also cannot forget that though economics takes preferences as given, they have to come from somewhere. Manipulating preferences is already part of public policy, most notably using education to inculcate preferences to be good citizens as well as to acquire useful skills. Although the puzzles mentioned here are real, we may not have the choice to ignore them, much as we might prefer to do so.

 

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4 thoughts on “The shaky foundation of benefit-cost analysis

  1. mcubedecon Post author

    A new paper showing that a gas tax aimed at carbon reduction cannot achieve a fully efficient outcome that would compensate all “losers” from the policy change. The paper moreover shows that being able to achieve a fully compensated policy is almost impossible and has important political implications.

    Pigou Creates Losers: On the Implausibility of Achieving Pareto Improvements from Efficiency-Enhancing Policies, by James Sallee, April 2019
    https://ei.haas.berkeley.edu/research/papers/WP302.pdf

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  2. Pingback: Paying off coal miners to improve the environment | Economics Outside the Cube

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