Distributional Effects and Benefit-Cost Analysis

The “efficiency” of a program depends on how the benefits and costs are distributed in a population and on the units in which benefits and costs are measured, the so-called “numeraire.” This under-appreciated fact belies the common understanding that benefit-cost analysis measures efficiency independently of distribution. In his new paper, “Accounting for the Distribution of Benefits and Costs in Benefit–Cost Analysis” (Article of the Month in the Journal of Benefit-Cost Analysis), CHDS faculty member James Hammitt shows graphically how the most efficient policy can depend on whether benefits and costs are measured in monetary units (as is conventional) or in health units (such as quality-adjusted life years). Benefit-cost analysis is not neutral with regard to distribution but depends on the choice of measuring rod. This choice determines how benefits and harms to different people are weighed and is a normative judgment. The paper is based on Hammitt’s keynote address to the First European Conference of the Society for Benefit-Cost Analysis, Toulouse, France, November 2019.

Learn more: Resource Pack: Introduction to Benefit-Cost Analysis
Learn more: Prioritarianism in Practice