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Unpublished Paper
The Legal Foundation of Cost-Benefit Analysis
ExpressO (2007)
  • Richard O. Zerbe, University of Washington
Abstract

The foundations of cost-benefit analysis (CBA) are legal, and this understanding provides a different view of it. This paper proposes to provide a fully realized foundation for CBA. Such a foundation rests on legal rights and also amends the failure of CBA to include moral sentiments, which arose in the attempt to avoid interpersonal comparisons. This amended legal foundation largely vitiates the extreme positions that have come to dominate thinking about CBA. CBA is increasingly questioned in the legal literature, even as it is being promoted by government practice and the economics literature, and the positions that have arisen from the ongoing debate make uncomfortable territory out of the hard-to-hold middle ground that attempts to find the proper combination of judgment and quantification.

The criticisms primarily concern moral and ethical limitations, though also technical ones. An important claim by critics is that CBA is a mechanical algorithm that is used to answer questions about what people want – the result of what Ted Porter describes as “lust after mechanical objectivity”. Critics say that CBA is missing values; that it pays too little attention to “good” values such as integrity and perhaps too much attention to “bad” values such as envy; that it is rooted in a narrow utilitarianism; that it uses private values where public values are relevant; that it favors the preferences of the rich and does not consider issues of income distribution or fairness; that it ignores transaction costs; that it is rendered useless by the Scitovsky reversal paradox; and that in attempting to combine incommensurables in a single metric it provides an answer that is without meaning.

CBA is, however, not to be separated from political discourse so that its use raises the question of whether or not it can enhance such discussion. In this paper I reclaim the hard middle ground by showing the logical connection between CBA, the law and moral sentiments. I place CBA within the context in which it is most useful: that of providing information, not the decision. In Part One, I explicate the history of CBA and its underlying economic theory. I then develop the concept of a fully realized CBA under the rubric of BCA. That is, as a matter of convenience, I treat BCA as a better-defined subcategory of CBA. The purpose here is to show that the legal foundation for BCA tends to ameliorate or eliminate the criticisms of mainstream CBA. In Part Two, I consider empirical analyses of CBA and the extent to which BCA is becoming the preferred choice.

Keywords
  • cost-benefit analysis,
  • moral sentiments,
  • benefit-cost analysis,
  • critics
Disciplines
Publication Date
March, 2007
Citation Information
Richard O. Zerbe. "The Legal Foundation of Cost-Benefit Analysis" ExpressO (2007)
Available at: http://works.bepress.com/richard_zerbe/2/