Integrating Ethics into Graduate Training
in the Environment Sciences Series
Unit 4: Ethical Dimensions of
Benefit-Cost Analysis in Environmental
Project and Policy Evaluation
AUTHOR: JAMES SHORTLE
Department of Agricultural Economics and Rural Sociology,
The Pennsylvania State University
With input from Nancy Tuana, Ken Davis, Klaus Keller, Michelle Stickler, Don
Brown, and Erich Schienke
Benefit-Cost Analysis (BCA)
• An analytical technique for evaluating the economic
efficiency of projects or policies based on evaluation
of economic benefits and costs
• Has become common in the U.S. and other countries
• Widely used by EPA and Congress for many statutes
in the US. (Hahn 2000 & Adler and Posner 1999)
Ethical Issues in BCA
• Issues within the welfare economics paradigm
– BCA is emerges from an explicit set of value judgments
– Ethical issues arise when applications and uses are
inconsistent with the underlying norms
• Issues about the paradigm
– Disagreement with the underlying value judgments
• Conduct of BCA
Uses of BCA
– Ex ante evaluation
•
•
•
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Systematic & logically consistent accounting of impacts
Tool for ranking competing projects or policies
A filter for negative sum rent seeking projects,
Inform policy makers about economically efficient outcomes
– Ex post evaluation
• How well did policies actually work?
• Tool for improving future policy based on actual experience
Normative Foundations of BCA
• BCA emerges from an explicit normative
foundation that seeks to answer the
fundamental question of applied welfare
economics:
What is the impact (both sign and magnitude)
of a change in resource allocation on social
welfare?
The Values of Welfare Economics
– Social welfare is an aggregation of human welfare
• Any consideration for nature in BCA is a derivative of the
contribution of the same to human welfare
– Individual human welfare is a function of “goods”
consumed
• The focus is on outcomes, not procedures
• Individual’s preferences are the basis for evaluating their welfare
outcomes
– Individual’s preferences are the basis for evaluating their
welfare outcomes
• Consumer sovereignty
• No moral judgments about individual preferences
Evaluation of Social Welfare Change
• Simple cases – welfare impacts are beneficial or detrimental
for all
– If beneficial, such a policy/project would either have all favorable votes
or some favorable but no unfavorable votes in a referendum
– If detrimental, the reverse would be true
• Contentious cases – changes in resource allocation benefit
some, harm others
– Such a policy or project would have some favorable and some
unfavorable votes in a referendum
• Question:
– How to evaluate these cases?
Criteria for evaluating social welfare
change
• Pareto Criterion
• Compensation Criteria
• Samuelson-Bergson Social Welfare Functions
Pareto Criterion
UA
Pareto Optimal State
B
A
D
C
UB
Initial Allocation
• Given two social
states A & B, B is
preferred to A if
in moving from A
to B at least one
individual is
made better off
and no one is
made worse off.
Limitations of the Pareto Criterion
• Incomplete ranking of social states
– Alternative optima are non-comparable, for
example B, C, and D.
• Conservative Re-enforcement
– Favors the status quo when trade-offs are involved
Compensation Criteria
• Test whether changes in resource allocation are potential
Pareto Improvements. Based on the concept of potential
compensation
– Hick’s Criterion- maximum WTP of losers greater than minimum
WTA of gainers. Property rights lie with gainers
– Kaldor’s Criterion- maximum WTP of gainers greater than minimum
WTA of losers. Property rights lie with losers
• BCA is the empirical implementation of compensation tests
• Compensation criteria are efficiency tests that ignore
distributional issues
Attributes of Compensation Criteria
• Compensation tests are tests of economic efficiency gains
– More complete ranking than Pareto Criterion. Allows comparison
between
• Second best social states
• First best and second best states
– But still incomplete…
– Cannot rank different first-best states
– Possibilities of logical inconsistency
• Intransitive rankings
• Possibility of reversal
Social Welfare Functions
• It is a real-valued function that maps from the
welfare of individuals to the welfare of society
W=W(UA, UB.....)
• Can provide a complete ranking of social
outcomes
Challenges in SWF analysis
• Choice of the social welfare function
– Two approaches
• Axiomatic Approach- form of function on the basis of axioms
about individual preferences (Arrows Impossibility Theorem)
• Moral Justice Approach- functional form arrived at on the basis of
moral considerations (Which rule?)
– Measurement of Individual Welfare
What does this mean?
• BCA is only one part of the economic welfare
assessment
– Welfare assessment entails deliberation on
economic efficiency - BCA provides information
to the effect
– When working within the paradigm, information
should be combined with conclusions arrived at on
the basis of equity principles using other methods
Ethical Issues within the Paradigm
• To be developed: Issues will include
– Appropriate uses
– Issues related to the implementation of the
technique
Ethical Issues about the Paradigm
• Outcomes versus decision making processes
– Procedural justice- regarding how a decision is made
– Citizen participation- regarding whether there is democracy
• Rights and Duties
– BCA focuses on anthropocentric welfare only
– Importance of nature in BCA contingent on nature’s
importance to man
– BCA figures do not reflect the impact of the project or
policy on nature
Discussion Issues
• When would we be comfortable using BCA?
– How much importance should we place on the
absent ethical issues?
• When can decision making solely depend on
BCA?
• How to consider catastrophic effects like
hurricanes and other natural disasters in BCA?
THANK YOU!