Cost-Benefit Analysis and Distributional Weights: An Overview

Duke Environmental and Energy Economics Working Paper EE 13-04

50 Pages Posted: 19 Jul 2014

Multiple version iconThere are 2 versions of this paper

Date Written: August 2013

Abstract

Cost-benefit analysis (CBA) is notoriously insensitive to distributional concerns, favoring a policy with a positive sum of monetary equivalents, even if better-off individuals are benefitted at the expense of worse-off ones. This problem is sometimes mitigated, in practice, by monetizing goods and bads using constant values that do not vary with individuals’ attributes. However, the use of population-average or otherwise constant values lacks any theoretical basis. Moreover, this practice can have unpleasant implications, for example, forcing people to spend more money on risk reduction than they would prefer. Arguably, equity considerations should be incorporated into CBA through so-called distributional weights. Specifically, CBA with distributional weights is a practicable method for operationalizing a social welfare function (SWF). Two SWFs and the functional form of weights matching them are discussed, and an example of how distributional weights might be brought to bear on environmental policy choice is given. Various objections to distributional weights are also discussed — Including the traditional objection that redistribution is best handled through the tax system.

Suggested Citation

Adler, Matthew D., Cost-Benefit Analysis and Distributional Weights: An Overview (August 2013). Duke Environmental and Energy Economics Working Paper EE 13-04. Available at SSRN: https://ssrn.com/abstract=2467673 or http://dx.doi.org/10.2139/ssrn.2467673

Matthew D. Adler (Contact Author)

Duke University School of Law ( email )

210 Science Drive
Box 90362
Durham, NC 27708
United States

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