Measuring Cost-EffectivenessMoreover, if we were using CBA there could be a case for an
even more generous test. This is because happiness depends
significantly on relative income, and not just on absolute in-
come.^9 When taxes are raised in order to finance the addi-
tional expenditure, relative income may not change much.
So the loss of happiness will be less than in the preceding
analysis. If this is allowed for, even more projects would pass
the test. This would require even more public expenditure.
This shows that cost- benefit analysis is not a politically re-
alistic approach to policy choice. We therefore recommend
focusing on cost- effectiveness analysis, with a maximum ini-
tial cost of $3,500 per additional point- year of happiness.
Taxes and Regulations
But, for governments, there are other important policy prob-
lems as well as how to spend a given budget total. There is
the issue of how to raise the taxes. The approach here is
more direct. If we envisage a self- financing tax change, we
simply evaluate how this alters the happiness of each mem-
ber of the population and aggregate these changes (if we
are, as assumed so far, simply maximizing the sum of happi-
ness across all individuals). Similarly, if we are considering
a new regulation, we simply add up its effects on happiness
across all members of the population. In practice of course a
new regulation may also affect the budget deficit, making
possible more (or fewer) opportunities for public expendi-
ture. So we need a way to value such extra money, in units
of happiness- years. We already have the answer: the value of
the extra money is the extra happiness years that are gener-
ated by the marginal public expenditure project.