The Case Against Cost Benefit Analysis

Abstract:     
In their new book, Priceless: On Knowing the Price of Everything and the Value of Nothing, Frank Ackerman and Lisa Heinzerling charge that the regulatory use of cost-benefit analysis (CBA) "gives us opaque and technical reasons to do the obviously wrong thing." While they build the most comprehensive case against CBA available in a popular book, they may not change the minds of CBA advocates. But they should win converts from those who have yet to take a position. This is particularly true if readers require CBA advocates to shoulder the burden of persuasion. It is not yet the job of opponents like Ackerman and Heinzerling to prove they have an answer better than CBA. It is the job of CBA advocates to prove that using this very expensive and complicated process is better than not using it. Priceless gives ample reason to doubt whether that case has been made.

This review essay has three parts. Part I defines CBA as Ackerman and Heinzerling use the term and places CBA in its current political context. Part II presents Ackerman and Heinzerling's case against CBA, focusing on their critique of influential regulatory "scorecards," the "willingness to pay" principle, and the practice of discounting non-monetary benefits. Part II strengthens the authors' case by developing a critique that I wish they had made more fully: the moral argument against CBA. This moral argument, in addition to Ackerman and Heinzerling's other critiques, helps set up my evaluation of CBA in Part III. Part III moves from a review of the authors' argument to an application of it. Here, I suggest that the best way to evaluate CBA is according to its own practical criteria, that is, by examining the need for a new regulatory method, by comparing the costs of that method to the benefits, and by considering other alternatives. By this measure, CBA appears, so far, to have flunked its own test. Priceless shows that the need for CBA has been overestimated by its proponents and that its costs have been underestimated. Heinzerling and Ackerman are less convincing when developing a stronger alternative to CBA. But until a persuasive case for CBA is put on the table, the authors' counter-proposal should be left to percolate.

Number of Pages in PDF File: 42

Keywords: Cost benefit analysis, environment, public health, regulation, economics

JEL Classification: I18, K00, K23, K32, L51

working papers series