Cost-Benefit Analysis: Too Often Biased

By Vejchodska, Eliska | E+M Ekonomie a Management, October 2015 | Go to article overview

Cost-Benefit Analysis: Too Often Biased


Vejchodska, Eliska, E+M Ekonomie a Management


Introduction

In current political practice in many countries, cost-benefit analysis (CBA) is applied in evaluating public projects and regulatory instruments. In evaluation using CBA, the effort is to express the comprehensive effect of a project or a governmental regulation on social welfare. Social welfare can be affected by changing environmental quality, improving quality of life due to better healthcare, etc. Since many projects essentially affect environmental quality either positively or adversely, the effect of non-monetary costs and benefits derived from changing environmental quality is often involved in CBA in addition to financial costs and benefits. CBA is therefore an evaluation method widely discussed in neoclassical environmental economics, e.g. [13], [12].

What has enabled CBA to become one of the most widespread methods in political decision-making? Dryzek [6] offers an explanation in his environmental discoursive analysis. According to him, methods such as CBA, risk analysis and EIA (environmental impact assessment) have penetrated political practice due to the overwhelming conviction that decision-making on political issues should be left to experts. That is why he believes expert agencies such as the US EPA (Environmental Protection Agency) and the United Nations Environment Programme have come into existence. CBA introduces this expertise to political decision-making. From the point of view of neoclassical economics, CBA is capable of answering the question whether a policy project or regulatory tool is beneficial or detrimental to society. According to neoclassical environmental economics, therefore, politicians should subject their crucial decisions influencing environmental quality to CBA. CBA advocates also see its application as a way to improve the efficiency of control over the meaningfulness of political action, increase the transparency of regulation and diminish the influence of lobby groups, as discussed e.g. in [4]. Politicians' decisions are not random: political action is supported by CBA results [1].

In the USA since Reagan's era the requirement to decide based on CBA in regulatory impact analyses (RIA) was anchored in the legislation by Executive Order 12291 in 1981. All the governmental agencies, including EPA, employ CBA in their decision-making [1]. The basic requirement for a monetary expression of monetarily quantifiable effects, therefore the application of CBA in RIA, remains preserved till now in the USA (partial amendments by Clinton's Executive Order 12866 in 1993 and Obama's Executive Order 13536 in 2011). CBA is also in abundant use in the EU political decision-making, although RIA analyses across European countries vary in their methodologies used for impact assessment. The only country long insisting on CBA for RIA analyses has been the UK [23]. In major European countries including France, Germany, Spain or Italy, RIA does not contain a robust economic appraisal [5]. CBA has been largely used in EU countries as a basis for decisions concerning allocation of subsidies from Structural Funds and the Cohesion Fund.

Although neoclassical economists agree on the meaningfulness of using CBA in decision-making, they subject parts of its methodology to scholarly reflection. CBA as a method within neoclassical economics has therefore been evolving in some aspects. Its real-world applications make use of different procedures based on different arguments. Due to the disunited methodology employed in practical CBA execution, the results of studies may be misleading. Two different studies of the same thing based on different methodologies may arrive at fundamentally different conclusions. CBA results may also be deliberately distorted by adjusting the method chosen to the required outcome. However, practical CBA may also involve other problems such as the degree of expertise of its performers (methodological problems of CBA for the Dutch case discussed in [20]). …

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