Public Finance, 2nd Edition

28

COMMON PITFALLS IN COST±

BENEFIT ANALYSIS

THE CHAIN REACTION GAME

THE REGIONAL MULTIPLIER GAME

THE LABOR GAME

PURE DOUBLE COUNTING

THE PUBLIC SECTOR BIAS CHARGE

CONCLUSION

Cost±beneWt analysis may be as much art as science, but any study that

presents a careful discussion of the issues presented in Chapters 24±27Ðthe

public rate of discount, uncertainty, the various measurement problems, and

the distribution of project costs and beneWtsÐwith all assumptions explicitly

stated, cannot help but inform the decision-making process. Many cost±

beneWt studies stray from these central issues, however, and emphasize

other factors that are essentially irrelevant to the fundamental question

which cost±beneWt analysis attempts to answer: Does a particular govern-

ment investment constitute the best possible use of society's scarce resources?

Once the peripheral issues gain prominence, cost±beneWt analysis loses its

ability to discriminate correctly among public investment alternatives.

It is hardly surprising that public forums such as congressional hearings

and the media tend not to emphasize the proper economic issues. They are

fairly technical and often diYcult for the public to understand (with the

possible exception of the distribution question). But since they happen to

be the relevant issues, public discussions of the economic implications of

proposed government projects are often badly misplaced, serving mainly to

reinforce commonly held misconceptions.

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