Benefit-Cost in a Benevolent Society

American Economic Review (Impact Factor: 2.69). 01/2006; 96(1):339-351.
Source: RePEc

ABSTRACT How should benefit-cost analysis account for the value that benevolent individuals place on others' enjoyment of public goods? When adding up the benefits to be compared with costs, should we sum the private valuations, the altruistic valuations, or something else? This paper argues that private valuations are appropriate if concern for the well-being of others respects their private preferences. The discussion has implications for family decision-making, welfare economics, and the design of applied contingent valuation studies.

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    ABSTRACT: Behavioral economics has captured the interest of scholars and the general public by demonstrating ways in which individuals make decisions that appear irrational. While increasing attention is being focused on the implications of this research for the design of risk-reducing policies, less attention has been paid to how it affects the economic valuation of policy consequences. This article considers the latter issue, reviewing the behavioral economics literature and discussing its implications for the conduct of benefit-cost analysis, particularly in the context of environmental, health, and safety regulations. We explore three concerns: using estimates of willingness to pay or willingness to accept compensation for valuation, considering the psychological aspects of risk when valuing mortality-risk reductions, and discounting future consequences. In each case, we take the perspective that analysts should avoid making judgments about whether values are "rational" or "irrational." Instead, they should make every effort to rely on well-designed studies, using ranges, sensitivity analysis, or probabilistic modeling to reflect uncertainty. More generally, behavioral research has led some to argue for a more paternalistic approach to policy analysis. We argue instead for continued focus on describing the preferences of those affected, while working to ensure that these preferences are based on knowledge and careful reflection.
    Risk Analysis 08/2011; 31(9):1408-22. · 2.28 Impact Factor
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    ABSTRACT: This paper estimates the health dimension of the welfare cost of homicides in Brazil incorporating age, gender, educational, and regional heterogeneities. We use the marginal willingness to pay approach from the “value of life” literature to assign monetary values to the welfare cost of increased mortality due to violence. The results indicate that the present discounted value of the welfare cost of homicides in Brazil corresponds to roughly 78% of the GDP or, measured in terms of yearly flow, 2.3%. The analysis also indicates that reliance on aggregate data to perform such calculations, without taking into account the relevant dimensions of heterogeneity, can lead to biases of the order of 20% in the estimated social cost of violence
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    ABSTRACT: As traditionally conducted, benefit-cost analysis is rooted in neoclassical welfare economics, which, in its most simplified form, assumes that individuals act rationally and are primarily motivated by self-interest, making decisions that maximize their welfare. Its conduct is evolving to reflect recent work in behavioral economics, which explores the psychological aspects of decisionmaking. We consider several implications for analyses of social programs, focusing largely on economic valuation. First, benefit-cost analysis often involves valuing nonmarket outcomes such as reductions in health and environmental risks. Behavioral research emphasizes the need to recognize that these values are affected by psychological as well as physical attributes. Second, benefit-cost analysis traditionally uses exponential discounting to reflect time preferences, while behavioral research suggests that individuals’ discounting may be hyperbolic. While the appropriate rates and functional form are uncertain, market rates best represent the opportunity costs associated with diverting funds to support a particular social policy or program. Such rates reflect the intersection between technological progress and individual preferences, regardless of whether these preferences fit the standard economic model or a behavioral alternative. Third, behavioral research emphasizes the need to consider the influence of other-regarding preferences on valuation. In addition to acting altruistically, individuals may act reciprocally to reward or punish others, or use the status of others as the baseline against which to assess their own well-being. Fourth, behavioral economics identifies factors that can help researchers develop valuation studies that provide well-informed, thoughtful preferences. Finally, while behavioral research has led some to argue for a more paternalistic approach to policy analysis, an alternative is to continue to focus on describing the preferences of those affected by the policy options while working to ensure that these preferences are based on knowledge and careful reflection. Benefit-cost analysis can be best viewed as a pragmatic framework for collecting, organizing, and evaluating relevant information.
    Journal of Benefit-Cost Analysis. 01/2011; 2(2):5-5.


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