The discipline of cost-benefit analysis

Abstract

This article examines the merits and demerits of several economic valuation methods used in cost-benefit analysis (CBA). Different methods of CBA, from the mainstream to the more inclusive ones, have different implications for decision-making. To illustrate, the mainstream CBA uses willingness-to-pay as an indicator of the value of public goods, although this method is not without its critics. The author argues that this limited, market-based approach fails to consider various relevant factors and ignores important aspects of consequential evaluation. He also argues that the mainstream CBA approach neglects distributional issues and the potential impacts of projects on individual freedoms. The prevailing CBA approach is problematic because of its reliance on willingness to pay data, which is often collected using flawed methodologies. The flawed methodology generated ambiguous results with questions such as stating a willingness-to-pay amount for an outcome, people frequently fail to consider what others are willing to pay. The author concludes that a more inclusive approach to CBA is needed, one that takes into account a broader range of values and incorporates social choice theory. – AI-generated abstract.