Cost-Benefit Analysis

• Kaldor-Hicks principle - if an allocation creates enough benefits to compensate those who lose from moving towards that allocation, then the allocation is justified
• Conducting a CBA:

  1. Figure out the portfolio of policies, including the baseline (not taking action)
  2. List and quantify the impacts on the affected population
  3. Predict the impacts over the life of the project
  4. Monetise all the impacts and discount them (obtain the NPV)
  5. Perform sensitivity analysis (changing discount rates)
  6. Make a recommendation
• When listing costs and benefits, both market and non-market values need to be considered
• When discounting projects in CBA, the government uses the social discount rate
• The UK government has a declining social discount rate to avoid making benefits and costs happening in the far away future disappear when discounted
• An advantage of CBA is that it's easier to make people perceive the extent of environmental damages when they are quantified as economic losses
• An advantage of CBA is that a consistent set of principles is applied in making decisions and can help raise efficiency
• An advantage of CBA is that its process can reveal informational needs allow to value what’s missing
• A disadvantage of CBA is that it follows a utilitarian approach and has no embedded ethical consideration
• A disadvantage of CBA is that the Kaldor-Hicks principle guides CBA but doesn’t focus on distributional aspects and ignores inequalities over time
• A disadvantage of CBA is that estimating over long periods of time creates uncertain outcomes, even if they are quantitative