Whenever people decide whether the advantages of a particular action are likely to outweigh its drawbacks, they engage in a form of benefit-cost analysis (BCA). In the public arena, formal BCA is a sometimes controversial technique for thoroughly and consistently evaluating the pros and cons associated with prospective policy changes. Specifically, it is an attempt to identify and express in dollar terms all of the effects of proposed government policies or projects. While not intended to be the only basis for decision making, BCA can be a valuable aid to policymakers.
Although conceived more than 150 years ago by the French engineer Jules Dupuit, BCA saw its first widespread use in the evaluation of federal water projects in the United States in the late 1930s. Since then, it has also been used to analyze policies affecting transportation, public health, criminal justice, defense, education, and the environment. Because some of BCA’s most important and controversial applications have been in environmental policy, this discussion of key issues in BCA is illustrated with examples from the environmental arena.
To ascertain the net effect of a proposed policy change on social well-being, we must first have a way of measuring the gains to the gainers and the losses to the losers. Implicit in this statement is a central tenet of BCA: the effects of a policy change on society are no more or no less than the aggregate of the effects on the individuals who constitute society. Thus, if no individual would be made better off by a policy change, there are no benefits associated with it; nor are there costs if no one is made worse off. In other words, BCA counts no values other than those held by the individual members of society.
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