On the Formulation of the Alternative Scenario in Cost-Benefit Analysis

CERE Working Paper, 2019:6

10 Pages Posted: 18 Jun 2019

See all articles by Per-Olov Johansson

Per-Olov Johansson

Stockholm School of Economics

Bengt Kriström

SLU- Centre for Environmental and Resource Economics (CERE)

Date Written: June 10, 2019

Abstract

In this note we discuss how a cost–benefit analysis could be formulated in a second-best world where lump-sum taxation is not available. The question is how the government’s budget is balanced. Different options are available. A value added tax or an income tax or a profit tax could be adjusted so as to balance the budget. Alternatively, expenditures on public or private goods are displaced. A variation occurs if the government has a policy target. For example, a certain number of hectares of valuable forest areas should be preserved. Then, the central part of a cost–benefit analysis is to compare the costeffectiveness of different policy instruments that can be used to achieve the target. However, there are also deadweight losses provided there are distortionary taxes. Such considerations also opens up for a broader formulation of the valuation question in willingness-to-pay experiments than one based on lump-sum taxation.

Keywords: Cost–effectiveness, cost–benefit analysis, second best, policy targets, deadweight losses, forestry, conservation, contingent valuation, choice experiments

JEL Classification: H41, I39, Q23, Q57

Suggested Citation

Johansson, Per-Olov and Kriström, Bengt, On the Formulation of the Alternative Scenario in Cost-Benefit Analysis (June 10, 2019). CERE Working Paper, 2019:6. Available at SSRN: https://ssrn.com/abstract=3401694 or http://dx.doi.org/10.2139/ssrn.3401694

Per-Olov Johansson (Contact Author)

Stockholm School of Economics ( email )

P.O. Box 6501
Stockholm
SWEDEN
+46 8 736 92 82 (Phone)
+46 8 30 21 15 (Fax)

Bengt Kriström

SLU- Centre for Environmental and Resource Economics (CERE) ( email )

Umea, 901 83
Sweden
+46-(0)90-7865219 (Phone)

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