Lost in Taxation

Abstract

Cost-Benefit Analysis (CBA) was developed to assess the net socioeconomic benefits of various projects in many fields. In this context, it is relevant to investigate how this method is used for project evaluation and whether its merits and limitations are properly understood by a wider community of economists. In this study, we showcase a debate in Italy in 2019 about an important high-speed rail project, following the publication of a CBA that received much criticism.

To learn from this episode, we find it useful to set up a meta-model of CBA that allows the formalization of a large number of CBA calculations (including potentially ill-founded calculations) and to verify their validity. With this meta-model, we review the criticisms formulated during the 2019 CBA debate focusing on two salient topics; whether CBA should include taxation and whether the Rule-of-Half measure of users’ surplus is valid.

Our analysis suggests: (1) That the proposed meta-equation can help in structuring the scientific debate regarding CBA and the relevant economic discussion about a given project; (2) with few exceptions, the criticisms formulated regarding the 2019 CBA on these topics were incorrect, mostly incoherent from an axiomatic point of view. This indicates that ill-founded methods are at risk of becoming well-accepted in the larger community of economists, with the risk of lowering the general quality of policy recommendations formulated by economists. This underlines the need for economists to revise the misguided views of CBA.

Keywords: Cost-Benefit Analysis, transport infrastructure, welfare function