Well-Being Analysis vs. Cost-Benefit Analysis

By Bronsteen, John; Buccafusco, Christopher et al. | Duke Law Journal, May 2013 | Go to article overview

Well-Being Analysis vs. Cost-Benefit Analysis


Bronsteen, John, Buccafusco, Christopher, Masur, Jonathan S., Duke Law Journal


ABSTRACT

Cost-benefit analysis (CBA) is the primary tool used by policymakers to inform administrative decisionmaking. Yet its methodology of converting preferences (often hypothetical ones) into dollar figures, then using those dollar figures as proxies for quality of life, creates significant systemic errors. These problems have been lamented by many scholars, and recent calls have gone out from world leaders and prominent economists to find an alternative analytical device that would measure quality of life more directly. This Article proposes well-being analysis (WBA) as that alternative. Relying on data from studies in the field of hedonic psychology that track people's actual experience of life--data that have consistently been round reliable and valid--WBA is able to provide the same policy guidance as CBA without CBA's distortionary reliance upon predictions and dollar figures. We show how WBA can be implemented, and we catalog its advantages over CBA. In light of this comparison, we conclude that WBA should assume CBA's role as the decisionmaking tool of choice for administrative regulation.

TABLE OF CONTENTS

Introduction
I. How Cost-Benefit Analysis Works, and Its Core Limitation.
      A. CBA and Welfare
      B. The Core Advantage of WBA over CBA
II. Well-Being Analysis
      A. WBA: The Basic Framework
      B. The Data of WBA
         1. Life Satisfaction Surveys
         2. Experience Sampling Methods
         3. The Quality of Well-Being Data
         4. Criticisms of Well-Being Data
         5. Deliberate Manipulation of Well-Being Data
      C. Well-Being Analysis: An Example
         1. EPA Regulation of Pulp and Paper Production: A
            Cost-Benefit Analysis
         2. The EPA's Cost-Benefit Analysis as a Well-Being Analysis
III. Willingness To Pay and Well-Being
      A. Revealed Preferences
         1. Informational and Computational Problems
         2. Wealth Effects
         3. Affective Forecasting Errors
      B. Contingent Valuations
         1. Hypothetical Questions
         2. Wealth Effects
      C. Willingness-To-Pay Measures and WBA: A Summary
      D. Wealth and Welfare
IV. WBA and the Value of Lives
      A. Not All Types of Death Are Equivalent
         1. Different Types of Threats to Life
         2. Different Types of Death
         3. How One Person's Death Affects Another Person's Welfare
      B. CBA's Attempted Improvements
      1. Statistical Life and Life Years
      2. Quality-Adjusted Life Years
      3. Well-Being Units
V. Discounting in CBA and WBA
Conclusion

INTRODUCTION

Virtually every law makes people's lives better in some ways but worse in others. For example, a clean-air law could make people healthier, but it could also force them to pay more money for the products they buy. (1) Every proposed law thus raises the question: Would its benefits outweigh its costs? (2)

To answer that question, there needs to be a way of comparing seemingly incommensurable things like health and buying power. The most common method is to ask how much money people are willing to pay for benefits like improved health (or how much money they are willing to accept for negatives like increased risks to their health). Suppose, for example, it could be determined that people are willing to pay $100 more per year in return for the health benefits of cleaner air. Those benefits could then be compared, by this first approach, to increased consumer costs.

This approach is called cost-benefit analysis (CBA), and it has long been the dominant method of systematic analysis for evaluating government policy. (3) Every economically significant regulation from executive-branch agencies must, by law, be evaluated via CBA (4) (or in some cases via cost-effectiveness analysis). (5) This has been the case since 1981, when President Reagan mandated it by executive order. (6) That order has been reaffirmed by every president since, including Presidents Clinton (7) and Obama. …

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