Efficiency vs. Welfare in Benefit-Cost Analysis: The Case of Government Funding

Abstract

Both Republican and Democratic administrations make regulatory and funding decisions with close reference to benefit-cost analysis (BCA). With respect to regulation, there has been a great deal of academic discussion of BCA and its limits, but almost no attention has been paid to the role of BCA in government funding. That is a serious gap, not least in connection with climate-related risks, such as wildfire, drought, extreme heat, and flooding. Office of Management and Budget (OMB) Circular A-94 sets out guidelines for the benefit-cost analysis required when applying to many federal discretionary grant programs. Through Circular A-94, OMB has long required applicants to demonstrate that the benefits of their projects would exceed the costs. But under Circular A-94 as it stood for many years, efficiency-based BCA could produce results that fail to maximize welfare and that are also highly inequitable. The 2023 revision of Circular A-94 focuses more directly on welfare and equity, which are now—not uncontroversially—being brought directly into policy. At the same time, the new Circular A-94 raises fresh questions about how best to promote welfare, and to consider equity, in practice. This article explains the economic foundations for promoting welfare through distributional weighting—and how the old BCA guidance fell short. It then offers recommendations on how to operationalize distributional weighting on the ground specifically for government spending programs—and for BCA more broadly.

Keywords: Benefit-cost analysis; efficiency; law and economics; welfare; administrative law; spending programs; distributional weighting

JEL Classification: D61, H50, H54, H23, Q52, R58, D63, K23