Chapter 15would require that the cost of 1 point- year of happiness be
no higher than $3,500.
Why Cost- Effectiveness Analysis Rather
Than Cost- Benefit?As we have said, this approach is a form of cost- effectiveness
analysis (CEA). It takes the total available expenditure as
given and tries to maximize the effectiveness with which the
money is spent. The critical benefit/cost ratio is expressed in
point- years of happiness per unit of money.
A quite different approach is that known as cost- benefit
analysis (CBA), where costs and benefits are computed in
the same metric and total public expenditure is only deter-
mined at the end of the process— by the number of poli-
cies that pass the test. In this case we could then turn dollar
cost into units of happiness by multiplying it by the effect
of income on happiness (∂.H/∂.Y), which is in traditional
language the “marginal utility of income.” Clearly this ap-
proach is very sensitive to estimates of the marginal utility
of income. If marginal utility is estimated by cross- sectional
analysis within a country, a typical finding (confirmed in our
Chapter 2) is that happiness (on a scale of 0– 10) increases by
0.2 points for every unit increase in log household income.
In other words the marginal utility of annual income is 0.2/
Annual Income. This in Britain would be about 1/125,000
point- years of happiness per $1.^8 So a cost of up to $125,000
would be acceptable if it generated 1 extra point- year of
happiness. This test is 40 times less strict than the cut- off of
$3,500 that we proposed for cost- effectiveness analysis and
would therefore let through much more expenditure.