Using and Improving Benefit-Cost Analysis

Benefit-cost analysis is a well-established and widely used approach for systematically assessing policy impacts, as discussed by CHDS’s Lisa Robinson in a recent Free Range Podcast. In a wide-ranging interview with host Michael Livermore, Robinson described the application of this approach and related controversies, including its advantages and challenges.

Robinson noted that while the goal is to estimate whether the benefits of a policy exceed its costs, the analysis does not always provide a definitive answer. Key impacts may be uncertain and some may be difficult to quantify or value. Regardless, benefit-cost analysis provides important information for decision-making.

Benefit-cost analysis is intentionally not paternalistic; rather, it focuses on the preferences of those affected for spending money to achieve specific policy outcomes rather than to acquire other goods or services. It is also “a way of getting people to talk about” the policy, more carefully examining their opinions and beliefs in the light of the available evidence.

A major challenge in conducting benefit-cost analysis and other forms of economic evaluation is understanding how benefits and costs will be distributed* – who will win and who will lose. While it can be relatively straightforward to estimate who will accrue the benefits, the distribution of costs is more difficult to assess. For example, in regulatory benefit-cost analysis, it may be unclear how the costs imposed on an entity (be it the government, private industry or others) will affect individuals. Will the organization absorb the costs (decreasing revenues to its owners), lay people off or reduce their wages, or pass on the costs to consumers as price increases?

Robinson finds that the many challenges of conducting benefit-cost analysis is what makes it endlessly interesting, however. She “fundamentally believes that benefit-cost analysis is an important contributor to good policy decisions,” ultimately improving social welfare.

Learn more: Listen to the full Free Range Podcast
Learn more: Resource Pack: Introduction to Benefit-Cost Analysis