Efficiency vs. Welfare in Benefit-Cost Analysis: The Case of Government Funding
31 Pages Posted: 4 Oct 2023 Last revised: 6 Feb 2024
Date Written: October 1, 2023
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. Through Office of Management and Budget (OMB) Circular A-94, OMB has long required applicants for federal funding 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. 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. 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 in the U.S. government and deeper challenges and tensions within BCA more broadly, 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
Suggested Citation: Suggested Citation