Valuing Health Risks, Costs, and Benefits for Environmental Decision Making Report of a Conference (1990) / Chapter Skim
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4. Benefit-Cost Analysis as a Source of Information About Welfare
4. Benefit-Cost Analysis as a Source of Information About Welfare
Pages 55-82
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From page 55... ...
The first part of this paper considers several questions about the scope and comprehensiveness of benefit-cost analysis in policy evaluation. In particular it is concerned with the compatibility of benefit-cost analysis with conceptions of social justice in which distribution, desert, or entitlement Peter Railton is associate professor in the Department of Philosophy at the University of Michigan 55
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From page 56... ...
This section argues the need for a distinction between, on the one hand, discounting future prices or willingness-to-pay indicators, a procedure that may be necessary for the accurate measurement of future costs and benefits, and, on the other hand, discounting future utilities themselves, a procedure that may lead to systematic mismeasurement. By way of conclusion, the paper suggests a role for benefit-cost analysis in highlighting future utilities that would otherwise lack adequate representation in the present.
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From page 57... ...
If certain complications are ignored and if population remains constant, and moreover if it is assumed that over time the benefits and burdens of social policies tend to be distributed randomly among individuals, then, when policies are implemented that all satisfy a standard of potential Pareto improvement, the expected value of all social positions will tend to rise. This rationale comes close to capturing a classical utilitarian standard of social choice (because overall utility increases if the expected value of all social positions rises)
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From page 58... ...
In a society in which past injustices call for such remedies, to restrict social choice to policies that represent potential Pareto improvements would be to decide, in effect, against these demands of desert or equity. A defender of benefit-cost analysis might respond to these considerations by suggesting that the scope of benefit-cost analysis be enlarged to encompass all normatively relevant features in social choice.
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From page 59... ...
These viewpoints constitute two poles of a substantive debate about the foundations and requirements of justice. Fortunately, it is not necessary to resolve this debate, or even enter into it, in order to carry out benefit-cost analysis that is, as long as a benefit-cost standard is not treated as the appropriate normative criterion of social choice.2 If a benefit-cost standard is not seen as a necessary or sufficient condition of social choice, how, then, should benefit-cost analysis be viewed?
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From page 60... ...
According to the more extreme forms of such theories, individual rights in person and property are natural rights of exclusion existing apart from social arrangements and constraining permissible social policy by setting up normative boundaries that cannot be crossed without the consent of the owner. Thus, for example, if the government were to allow dust and diesel fumes from the building and operation of a new intercity rail line to drift, unbidden, onto private property, then the integrity of that property would have been violated.
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From page 61... ...
The test of potential Pareto improvement addresses just this sort of measurement problem, although its application within a Lockean scheme would have to involve actual rather than merely possible compensation. This requirement in turn would mean including transaction costs in the assessment.
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From page 62... ...
Once benefit-cost analysis is understood as a process meant to yield information rather than to make decisions, practitioners of benefit-cost analysis need not take sides in controversies over the nature of justice. At the same time, it would be quite controversial-indeed, it would almost certainly amount to taking sides against widely held deontological conceptions of justice to attempt to assimilate the theory of rights into a benefit-cost framework by assigning monetized costs to violations of rights and then entering such costs into an aggregative, balancing scheme.
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From page 63... ...
By contrast, if one were simply an outright skeptic about the notion of welfare or about the possibility of learning about one's own good, there would be no clear rationale for giving more credence to the opinion of a given person than to the opinion of some randomly selected third party about the effects of a given social policy on that individual's wellbeing. In addition, there would be no clear rationale for granting informed preferences more authority than uninformed ones.
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From page 64... ...
Yet unless one believes that behind choice lies an effort by individuals actually to achieve their goals, it is unclear why choice behavior even warrants the term preference. It certainly becomes problematic to determine how choice behavior could be a basis for deciding whether and to what extent individuals have received benefits, borne costs, or undergone compensation.
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From page 65... ...
1b take the test of potential Pareto improvement seriously for purposes of social choice, it is necessary to believe that the sorts of choice behavior on which the assessments are based can be plausibly interpreted as reflecting the choosers' views about how their well-being is likely to be affected. Now, the real question of this section can be posed: Under what circumstances will a test of potential Pareto improvement reliably be informative about net effects on well-being?
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From page 66... ...
Recognizing this phenomenon has an important effect on the interpretation of tests of potential Pareto improvement. Indicators of willingness to pay that are based on prices or related choice behavior will reflect the marginal utility of "the last unit." For example, an analyst might use the amount I am willing to pay as an entry fee into a wilderness area or for a fishing permit to measure the cost to me of converting some forest area to commercial use or of the environmental degradation caused by acid rain.
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From page 67... ...
It is not part of the potential Pareto improvement test that such a transfer takes place, however. Because there is no actual compensation, the test involves what is in effect an interpersonal utility comparison of a $C-valued-by-Jones loss with a $D-valued-by-Smith gain.
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From page 68... ...
This might not be worrisome if the net errors that remain within assessments of individual policies themselves varied randomly from the assessment of one policy to the next, so that within sequences of policies, the effects of assessment errors would tend to cancel each other out over time. I know of no general reason to expect that this sort of balancing will occur; on the other hand, there is a general argument based upon diminishing marginal utilityshowing a systematic tendency toward nonrandom, regressive error.
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From page 69... ...
lbo much is known about what money, or any other good, means to an individual's well-being to convince anyone that this comparison can be settled simply by asking whether $D is greater than $C. To much is known, that is, to be persuaded that an uncorrected potential Pareto improvement test captures as fully as possible the welfare effects of social choice.l5 Preferences Involving Poor Information or Other Cognitive Defects ~ the extent that one is prepared to use market prices or choice behavior as indicators of willingness to pay and, ultimately, of welfare, one must believe that the people involved are rational, reasonably well informed, confronted with an appropriate array of options, and so on.
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From page 70... ...
Such considerations may in any given case have a significant effect on willingness to pay, although they will greatly complicate the interpretation of choice behavior as a straightforward indication of individual evaluation of risk. A policeman or fisherman may demand less in compensation for a job-related risk that is deemed socially expected or gender appropriate, or that is connected with a socially valued activity, than he would demand for a risk with none of these features (e.g., passive exposure to an environmental toxin)
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From page 71... ...
Both figures seem likely to reflect some departure from cognitively ideal deliberation. Finally, it is important to take indirect welfare effects into account whenever cognitive defects are present.
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From page 72... ...
Thus, some adjustment in the interpretation of choice behavior may be called for whenever other-directed preferences can be expected to play a large role. This approach does not at all preclude the measurement of indirect welfare effects, although it requires some attention to the sorts of preferences that are consulted when assessing such effects.
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From page 73... ...
A fuller accounting, however, would also consider what is now painfully evident: the limited space available for the purpose of solid waste disposal and the long-term costs of filling that space with nondegrading bottles and cans. Moreover, Porter's analysis looks at energy consumption in container production versus consumption in container recycling (because this measure is fairly readily gauged)
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From page 74... ...
Either the policy analyst must believe that these difficult-to-quantify contributors to welfare can be ignored perhaps because they tend to cancel one another out, although this would be hard to believe in general-or he or she must be committed in advance to building many caveats into the final benefit-cost assessments and to bringing many more qualms and considerations directly to the attention of decision makers. The five sources of possible inaccuracy that have been discusseddiminishing marginal utility in the intrapersonal case, diminishing marginal utility in the interpersonal case, preferences involving poor information or other cognitive defects, preferences not related to welfare, and the absence of appropriate markets-are all subject to some degree of correction, and this fact suggests something about how benefit-cost analysis might be improved as a measure of individual welfare.
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From page 75... ...
By symmetry, people of the future will prefer benefits in the future, which is their present. Thus, if existing time preferences are used to discount the benefits and costs of a social 19For example, people continue to set aside savings even when, as has often been the case in recent decades, the real after-tax rate of interest on savings is indistinguishable from zero (Lied, 1982:84~.
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From page 76... ...
This efficiency-based argument is temporally neutral; it functions to show that there is no real inconsistency in practice between, on the one hand, making decisions about consumption versus investment based on social time preference, and, on the other, counting all welfare effects equally, whenever they occur. What role would discounting play in such a schemed Because future generations are assumed to be more prosperous than those alive today, HI am indebted here to Allan Gibbard's comments on the original version of this paper.
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From page 77... ...
This approach avoids the overestimation of future costs and benefits, which could result in mismeasurement of the relative value of competing policies that differ in terms of when their costs and benefits will obtain. From the standpoint of the present, a future monetized measure can be discounted to solve a problem of intertemporal comparison and obtain an accurate portrait of effects on utility over time.
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From page 78... ...
Still, the function of benefit-cost analysis, as understood here, is to give the fullest possible accounting of welfare effects. Such an accounting might simply confirm the view that, in practice, acting on existing time preferences will not lead to policy choices that would in effect underrepresent future utility.
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From page 79... ...
One must, for example, be sensitive to the opportunity costs of capital, to worries about displacing investment, and to the compounding effects of taking benefits earlier rather than later. Yet in all such cases, future costs and benefits must be measured without actually discounting future utilities.
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From page 80... ...
It would be unfortunate if the hard-headed practicality behind monetization were to yield to mystification just at the point when its proper goal has been accomplished. In sum, in this second-best world, decision makers cannot believe that they are entitled to carry out blanket discounting of future costs and benefits on the basis of an assumption that the welfare of future generations is being adequately protected by the underlying productivity of the economy.
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From page 81... ...
It remains to be seen whether practitioners of benefit-cost analysis will seize on this- perhaps unexpected-opportunity to plant their analytic banner on the moral high ground. ACKNOWLEDGMENTS I would like to thank Allan Gibbard, Edward Green, Roger Noll, Robert Solow, and Hal Varian for helpful criticisms of an earlier draft of this paper.
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From page 82... ...
82 BENEFIT-COST ANALYSIS AND [YELF~4RE 1986b Locke, stock, and peril: Natural property rights, pollution, and risk.
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