Over the past year, I have had some correspondence with Aidan Vining, one of the co-authors of a leading textbook on public policy analysis and the “bible” of cost-benefit analysis. This has been exciting for me because few people have had a larger hand shaping guidance for this generation of public policy analysis than Dr. Vining. His perspectives on policy analysis broadly and cost-benefit analysis specifically have been incredibly influential to both the profession and me.
Last month, Vining emailed me a journal article he just published in the Journal of Benefit-Cost Analysis titled “Ten Principles of Cost-Benefit Analysis and Five Barriers to Its Wider Use.” I thought it would be valuable to share these ten principles on this blog because they are helpful to understanding how cost-benefit analysis works.
1. Cost-benefit analysis measures efficiency, not overall social welfare.
Vining argues that cost-benefit analysis is a tool for analyzing “allocative efficiency,” not “social welfare.” What does this mean?
Basically, what he is saying is that cost-benefit analysis helps us understand whether a policy will make the economic “pie” bigger–whether it will increase the amount of value in society, measured in dollars. This is not the same as measuring whether society is better, because distribution of that value may matter. My graduate school benefit-cost professor Dan Acland thinks that it is appropriate to fold utility measures into cost-benefit analysis. Vining argues against this, saying it is better to present those measures alongside traditional willingness-to-pay results.
This is a matter of controversy in cost-benefit analysis, but my inclination, to the chagrin of my mentor and friend Dr. Acland, is still to say dollars should be presented as dollars and weights should be presented alongside them. This transparency allows the policymaker to get the full analysis rather than obscuring standard willingness to pay beneath weighted willingness to pay.
2. The individual is the basic unit of analysis.
I find this to be a very interesting element of economic analysis in general. In economic analysis, the whole is always equal to the sum of its parts. Vining argues this is a “minimalist meaning of methodological individualism,” but it is indeed philosophically weighty. What we value about being parts of social units seems to transcend what we gain from them individually, at least when done right. A marriage is not just the benefits it bestows on both parties, it is a good in itself. It is useful to understand, though, that cost-benefit analysis has little value to understanding that sort of good and how social organization interacts with it.
3. People’s choices are usually treated as rational.
Vining says that cost-benefit analysts generally assume that people make their decisions based on their preferences and that they are rational and well-informed. This is an underlying assumption throughout economic analysis as a whole, with some exceptions. In our cost-benefit analysis we conducted on cigarette taxes last year, we used a model developed by cost-benefit researchers to estimate how much of cigarette consumption is “rational,” treating irrational consumption as deadweight loss. Vining’s frequent collaborator David Weimer has also written a book on how to incorporate economic research findings on systematic irrationality into cost-benefit analysis models.
4. Existing property rights usually provide the starting point for analysis.
Cost-benefit analysis is usually conducted to evaluate a policy that could, will, or has been implemented. Since a policy requires a change from a status quo, cost-benefit analysis evaluates a change from a certain status quo. This can have methodological impacts, like whether to use “willingness to pay” or “willingness to accept” measures. It also means cost-benefit analysis is not a good policy for telling you who has the rights to certain goods and services, just whether a policy will increase or decrease the amount of value people get from them given the current resource distribution.
5. Each affected person counts equally.
Traditionally done, cost-benefit analysis treats each individual’s costs and benefits as equally important. Even Dan Acland’s equity weighting scheme is ultimately about trying to bring costs and benefits closer to being in line with utilitarian impact, thus treating each individual equally. Vining says this makes economic impact and “stakeholder-specific” analysis fundamentally incompatible with cost-benefit analysis. I have written in the past about how “personhood” may even be too narrow of a definition for standing in the use of cost-benefit analysis.
6. Value is primarily measured through willingness to pay or accept.
Cost-benefit analysis is ultimately the project of evaluating the satisfaction of preferences throughout an economy. This means that the criteria for a cost-benefit analysis has to be the value people place on goods created by (or destroyed by) a given policy. Using revealed preference, survey, time use proxies, estimation of value of statistical life, or other strategies that focus on how people themselves value outcomes is key for effective cost-benefit analysis.
7. Future impacts must be discounted.
People prefer present benefits to future benefits and future costs to present costs. Vining argues that some of this is irrational, but some is not. Vining lays a stake in the discounting debate, noting a discount of two to three percent, though acknowledging many other governments go much higher. We have written a lot about discount rates in the past.
8. CBA follows a “no-envy” rule.
While there is some evidence that benefits that accrue to some people cause psychological costs to others (think “keeping up with the Joneses”), cost-benefit analysis tends to stay away from factoring these impacts into the analysis of the total value of those benefits. This helps cost-benefit analysis stay in the lane of estimating allocative efficiency and not smuggling equity measures into the analysis, thus making the analysis more obscure.
9. The nation is ordinarily how standing is determined.
This is an interesting claim and a new one for me. Not the result of the claim, but the logic that gets us there. Vining argues that constitutions can be treated as “efficient” since members all gain the benefit of society. This makes constitutional government a legitimate basis for cost-benefit analysis, which could be national, but also can apply to some states. Vining argues that municipal governments do not have constitutions, though does not make it clear why city charters and “home rule” provisions do not qualify in the same way a state constitution does. But this is his argument for why economic impact analysis does not qualify as cost-benefit analysis: people have standing outside of the analysis area unless some sort of constitution draws that line.
10. International agreements can sometimes expand that boundary.
Vining argues that contracts between states can increase standing. This comes up when we do analysis of carbon emissions, which usually have small local costs and large global costs. Vining’s argument implies that an international agreement to curb emissions could lead to full global valuation of carbon emission reductions for national projects.
Vining’s paper provides a good overview of some key underpinnings of cost-benefit analysis. Good exercise of cost-benefit analysis means understanding what it is doing, understanding how it works, and understanding its limits. If analysts can do these things well, cost-benefit analysis will continue to be a valuable tool for making more efficient public policy.
