On Non-Marginal Cost-Benefit Analysis

Conventional cost-benefit analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal in the sense that it will not significantly change relative prices. In particular, it is assumed that the policy or project does not change the underlying growth rate of the economy. However, these assumptions may be inappropriate in some important circumstances, such as large development projects in small economies, or large-scale infrastructure investment programmes. This paper develops the theory on the evaluation of non-marginal policies and projects, with an empirical application to the mitigation of global climate change. We examine the conditions under which evaluation of a non-marginal project using marginal methods may be both qualitatively and quantitatively wrong, and explore the magnitude of the potential error using a commonly employed integrated assessment model of climate change.

Keywords: Cost-Benefit Analysis, Non-Marginal, Project Appraisal, Discount Rate, Infrastructure Investment, Climate Change, Hydropower Dam

JEL Classification: H43, D61, Q54

Suggested Citation: Suggested Citation

Dietz, Simon and Hepburn, Cameron J., On Non-Marginal Cost-Benefit Analysis (March 11, 2010). Grantham Research Institute on Climate Change and the Environment Working Paper No. 18, Centre for Climate Change Economics and Policy Working Paper No. 20, Available at SSRN: https://ssrn.com/abstract=957992 or http://dx.doi.org/10.2139/ssrn.957992