Measuring Cost-Effectivenessto promote these public goods? Unfortunately, no. It has been
shown repeatedly that asking people hypothetical questions
about how they value these things produces nonsensical an-
swers.^10 So data on the happiness effects of these activities of-
fers a better, new method of evidence- based policy making.
Traditional cost- effectiveness analysis can be very infor-
mative in some areas, but for the bulk of public or NGO
expenditure, it cannot provide much help. In economists’
jargon, these are areas bedeviled by externality, public goods,
and asymmetric information— which is precisely why the
state has become involved in them— in order to produce a
more efficient outcome. And in these cases the natural ap-
proach is to measure benefits in units of happiness.
But why not, some economists say, then translate them
into units of money? From a normal happiness equation,
we can after all translate a given change in happiness into an
equivalent change in income for the person in question.^11
The method is to divide the person’s change in happiness
(ΔH) by his or her marginal utility of income (∂Hi/∂Yi)
(which is of course higher the poorer the person is). We
could then, as in standard cost- benefit analysis, add up these
equivalent variations across individuals (taking no account
of whether the beneficiary is a tramp or a Trump).
There are two overwhelming objections to this approach.
First, it automatically makes changes in happiness less im-
portant if they occur to poor people. To avoid this, the results
could be shown separately for different income groups. But
why make it so difficult? Second, we might not in any case
want to simply add the ΔHi but rather to give extra weight
to those with low initial happiness. If the monetary valuation
procedure is followed, there is no way to do this, since the
happiness level of each individual has become invisible.