chapter  6
26 Pages

An introduction to benefit-cost analysis

Benefit-cost analysis is the cornerstone of the economic analysis of policy, and is also closely aligned with the rational choice model from microeconomics. The primary goal of this analysis is to identify the policy option with the greatest social net benefit, and therefore the greatest efficiency. Benefit-cost analysis is subject to all of the criticisms discussed in Chapter 1, including possible overemphasis on efficiency versus equity, rational pragmatism versus values, and markets versus government. It is also subject to criticism regarding its attempts to assign dollar values to socially valued goods that are not bought and sold in the marketplace, particularly human life and the assets of nature. This criticism is based partly on the difficulty of assigning such dollar values, and partly on the morally questionable nature of such valuation. However, as we will see in the following five chapters, understanding the meaning and applications of these tools will probably lessen the influence of many of these criticisms. Benefit-cost analysis is a commonly used tool because the efficiency issues it emphasizes cannot be adequately considered any other way.