Project evaluation with democratic decision-making: What does cost¬タモbenefit analysis really measure?

Abstract

a r t i c l e i n f o It is often argued that projects involving public good changes should be chosen on the basis of monetary valuation and cost–benefit analysis (CBA). However, CBA is not value-free. When used to measure welfare, it is based on highly controversial value judgements. When used to measure efficiency, it is based on assumptions of limited relevance to democratic decision-making processes. CBA measures total net willingness to pay, neither more nor less. While interesting in its own right, the normative significance of this indicator is not obvious. Markets function poorly when it comes to provision of public goods, such as a stable global climate, air quality, biodiversity and many other ecosystem services. Securing a reasonable supply of such goods is thus an important task of government. Economic analysis of potential public sector projects should, to the extent possible, contribute to decision-makers' understanding of what is at stake, regardless of whether consequences have market values. In environmental economics, a common approach to public project evaluation is thus to estimate people's willingness to pay for changed public good provision, use this as a measure of the social benefits of the environmental change at hand, and then compare these benefits to project costs and other social impacts through cost–benefit analysis (CBA). The resulting indicator is usually called the project's 'net benefits' or 'net present value', and is often interpreted as a measure of its social desirability. Some scholars explicitly consider CBA as a tool for measuring a project's contribution to social welfare; others, while not necessarily accepting the welfare interpretation, speak of it as a means to indicate projects' efficiency. 1 However, even for the efficiency interpretation, the theoretical rationale can be questioned. CBA can be interpreted normatively or positively (Hammitt, 2013). In the present paper, I will discuss what CBA really measures. Turning first to the normative interpretation, I spell out some of the highly controversial ethical and/or political premises one implicitly accepts if using CBA as a normative guide. I next discuss the efficiency interpretation, arguing that it relies on assumptions that are rarely valid in democratic project evaluation processes. Finally, I briefly sketch an alternative approach to economic project analysis, based on the idea that the analyst's job is to convey and summarize relevant facts, pointing out the pros and cons, while final conclusions are determined (whether one likes it or not) …

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