The Basics of Benefit-Cost Analysis 475Dollar Values
Critics of benefit-cost analysis point out the difficulty (and perhaps impossibil-
ity) of estimating dollar values for many impacts. How does one value clean air,
greater national security, unspoiled wilderness, or additional lives saved? How
does one value a benefit that will occur in 50 years’ time? As we shall see, the
most difficult valuation problems arise when benefits and costs are highly
uncertain, nonmarketed, intangible, or slated to occur in the distant future.
Proponents of benefit-cost analysis do not deny these difficulties; rather,
they point out that any decision depends, explicitly or implicitly, on some kind
of valuation. For instance, suppose a government agency refuses to authorize
$240 million for spending on highway safety programs that are projected to
result in 50 fewer highway deaths annually. The implication is that the lives
saved are not worth the dollar cost. Given the realities of limited resources, it
is hard to argue that lives are priceless or impossible to value. The agency’s
decision indicates that, in its reckoning, the value of such a life saved is less
than $4.8 million. Virtually all economic decisions involve trade-offs, issues of
dollar values and costs. The fact that these problems are difficult is no justifi-
cation for ignoring or avoiding them. The strength of the benefit-cost approach
is that it highlights these trade-offs, at the same time acknowledging that many
values are imprecise or uncertain.Efficiency versus Equity
The third step underscores a fundamental tenet of benefit-cost analysis: that
only total benefits and costs matter, not their distribution. Thus, a program
should be undertaken if it is beneficial in the aggregate, that is, if its total dol-
lar benefits exceed total costs. But what if these benefits and costs are unequally
distributed across the affected population? After all, for almost any public pro-
gram there are gainers and losers. (Indeed, any citizen who obtains no bene-
fit from the program is implicitly harmed. He or she pays part of the program’s
cost either directly via higher taxes or indirectly via reduced spending on pro-
grams the person would value.) Shouldn’t decisions concerning public pro-
grams reflect distributional or equity considerations?
Benefit-cost analysis justifies its focus on efficiency rather than equity on a
number of grounds. The first and strongest ground is that the goals of effi-
ciency and equity need not be in conflict, provided appropriate compensation
is paid among the affected parties. Consider a public program that generates
different benefits and costs to two distinct groups, A and B. Group A receives
a benefit of $5 million; group B suffers a loss of $3 million. The immediate
impact of the project is clearly unequal. Nonetheless, if the gainers pay the los-
ers, both groups can profit from the program. The requisite payment must
exceed $3 million but not exceed $5 million.c11RegulationPublicGoodsandBenefitCostAnalysis.qxd 9/29/11 1:34 PM Page 475