A Better Calculus for Regulators: From Cost-Benefit Analysis to the Social Welfare Function

77 Pages Posted: 28 Feb 2017 Last revised: 4 Apr 2017

Date Written: February 25, 2017

Abstract

The “social welfare function” (SWF) is a powerful tool that originates in theoretical welfare economics and has wide application in economic scholarship, for example in optimal tax theory and environmental economics. This Article provides a comprehensive introduction to the SWF framework. It then shows how the SWF framework can be used as the basis for regulatory policy analysis, and why it improves upon cost-benefit analysis (CBA).

Two types of SWFs are especially plausible: the utilitarian SWF, which sums individual well-being numbers, and the prioritarian SWF, which gives extra weight to the well-being of the worse off. Either one of these is an improvement over CBA, which uses a monetary metric to quantify well-being and is thereby distorted by the declining marginal utility of money. The Article employs a simulation model based on the U.S. population survival curve and income distribution to illustrate, in detail, how the two SWFs differ from CBA in selecting risk-regulation policies.

Keywords: Social Welfare Function, CBA, Risk Regulation, Utilitarian, Prioritarian

Suggested Citation

Adler, Matthew D., A Better Calculus for Regulators: From Cost-Benefit Analysis to the Social Welfare Function (February 25, 2017). Duke Law School Public Law & Legal Theory Series No. 2017-19. Available at SSRN: https://ssrn.com/abstract=2923829 or http://dx.doi.org/10.2139/ssrn.2923829

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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