ABSTRACT
While federal agencies conducting benefit-cost analyses have, for the most part, employed benefit measures consistent with economic theory, they have inappropriately used private expenditures as a mea sure o f social cost. From a social welfare perspective, the correct theo retical cost measure is the monetized change in social welfare due to reallocation o f resources from production o f goods and services to pollution abatement activities. If one assumes that social welfare can be measured using a function additive in individual utilities, then social cost is equal to the sum of individual compensating variations. Moreover, under the additivity assumption, a theoretically consistent social cost estimate can be constructed from observable market infor mation.
