Public Finance, 2nd Edition

27

COST±BENEFIT ANALYSIS AND

THE DISTRIBUTION OF INCOME

JUSTIFICATIONS FOR IGNORING

DISTRIBUTIONAL CONSIDERATIONS

JUSTIFICATIONS FOR INCLUDING

DISTRIBUTIONAL CONSIDERATIONS

INCORPORATING DISTRIBUTIONAL PARAMETERS

Nonoptimal Income Distribution and Shadow Prices: The

Boadway Framework

The Weisbrod Framework

CONCLUSION

Anyone undertaking a cost±beneWt study faces a diYcult question at

the outset: Should cost±beneWt analysis rank government projects strictly

on the basis of their aggregate present value, or should the analysis consider

the distribution of the project's beneWts and costs as well? Normative theory

argues strongly for the latter interpretation if the income distribution is

nonoptimal. Ideally, cost±beneWt analysis should rank projects according to

their contributions to social welfare, and it can only do this if it includes the

distributional consequences of the various projects.

Ignoring distributional considerations is vastly simpler, but it limits cost±

beneWt analysis to an exercise in eYciency. This may not be such a bad

strategy. One long standing view of cost±beneWt analysis holds that it is

only meant to rank projects on the basis of their relative eYciencyÐthat is,

their aggregate present values. The feeling was that knowing the relative

eYciency rankings of the proposed projects is useful information to the

policymaker. But if society is not willing to choose projects on this basis

alone, then cost±beneWt analysis becomes only an intermediate step in the

overall process of project selection. It leaves as an open question, from a

social welfare perspective, the relative importance of the included eYciency

information and the excluded distributional information.

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