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

Abstract

In Republican and Democratic administrations, regulatory and funding decisions have both been made with close reference to benefit-cost analysis (BCA). With respect to regulation, there has been a great deal of scholarly 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. In OMB Circular A-94, the Office of Management and Budget has long required applicants for federal funding to demonstrate that the benefits of their projects would exceed the costs. Under Circular A-94, efficiency-based BCA can produce results that fail to maximize welfare and that are also highly inequitable. The 2023 revision of Circular A-94, focused on welfare and equity, reflects an effort to incorporate new academic thinking over the past three decades, which is 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. Pressing issues involve the use of distributional weights in funding decisions and also the use of averages across populations, which might be seen as a form of distributional weighting. More broadly, the trajectory of this benefit-cost guidance, which predates the guidance for regulation and originally covered regulation, helps uncover the logic under which BCA has been operating and deeper challenges and tensions within BCA, in the past and going forward.

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