The potential for mutually beneficial compensation exists as long as the
program’s total net benefit is positive. There are myriad instances in which
compensation is paid. For instance, the extension of a desperately needed high-
way (which would generate significant regional benefits) inevitably means tak-
ing land and private homes by eminent domain. Compensation for these losses
is accomplished by paying the owners fair market value for the properties. Yet
compensation is the exception rather than the rule. In the vast majority of pub-
lic programs, winners do not compensate losers at all.
The second argument for ignoring equity relies on a form of division of
labor. Distribution is best addressed via the progressive tax system and through
transfer programs that direct resources to low-income and other targeted groups.
According to this argument, it is much more efficient to use the tax and transfer
system directly than to pursue distributional goals via specific public investments.
Blocking the aforementioned project on equity grounds has a net cost: forgoing
a $5 million gain while saving only $3 million in cost. Redistribution via taxes
and transfers conserves dollars; there is no net loss. But, of course, how well the
tax system addresses distribution problems is open to debate.
A third argument in the efficiency-equity debate focuses on the aggregate
impact of applying the benefit-cost rule over many projects. The contention is
that by following this rule—that is, undertaking only net beneficial projects—
long-run total benefits are maximized andproject-specific inequities will tend
to even out. Clearly, this last contention is an empirical issue.
We make one final observation about the efficiency-equity debate. Although
it is not common practice, benefit-cost analysis nonetheless is amenable to the
introduction of distributional issues. As step 1 indicates, the benefit-cost method
identifies, untangles, and disaggregates the various benefits and costs of all
affected groups. This, in itself, is an essential part of making distributional judg-
ments. In standard benefit-cost analysis, when costs and benefits are added, all
groups’ benefits or costs carry equal dollar weight.One could, however, employ
unequalweights to account for distributional concerns. For instance, if group B
in the preceding example consists of low-income residents, their dollars might
be accorded twice the weight of group A’s dollars. With these weights, the ben-
efit-cost analysis now becomes $5 (2)($3) $1 million. Thus, the program
would not be implemented because of its effect on distribution. A similar dis-
tributional analysis would support investing in a program (even if its net bene-
fit is negative) if its benefits accrue to the neediest in society and its costs fall on
the most affluent.EVALUATING A PUBLIC PROJECT
In this section, we apply benefit-cost analysis to a public investment decision:
building a bridge. The decision is not simply whether to invest in the bridge or
save one’s money. Instead, there are other questions: Is the public investment476 Chapter 11 Regulation, Public Goods, and Benefit-Cost Analysisc11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/29/11 1:34 PM Page 476