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4
Benefi~-Cost Analysis as a Source of
Information About Welfare
PETER RAILTON
"Benefit-Cost Analysis: Threat or Menace?" is the theme of many
philosophical discussions, but it is not the theme of this one. It does not
seem to me that the very idea of benefit-cost analysis is a moral outrage
or a conceptual absurdity. On the contrary: I am prepared to think that
good benefit-cost analysis could do much to improve the reasonableness
of policy making. At the same time, however, I am quite uncertain as to
whether the actual application of benefit-cost analysis has generally had a
salutary effect on environmental policy making, in part because I have some
doubts about the justifiability of certain practices that appear common in
actual applications of the process. My aim in this paper is to make some of
these doubts clear and to indicate roughly how benefit-cost analysis might
be carried out in a way that would substantially mitigate them.
My strategy in discussing these doubts is inspired by a question put to
me by someone involved in the practice of benefit-cost analysis: "What do
I have to believe in order to do this?" I will consider various actual and
possible practices in benefit-cost analysis as it is applied to governmental
regulation of risk and discuss what one might have to believe in order to
defend such practices. I will then ask whether such beliefs seem tenable.
When they do not, I will suggest what one might more credibly believe
about the matter at issue and how these changes in belief might affect the
practice of benefit-cost analysis.
The first part of this paper considers several questions about the scope
and comprehensiveness of benefit-cost analysis in policy evaluation. In
particular it is concerned with the compatibility of benefit-cost analysis with
conceptions of social justice in which distribution, desert, or entitlement
Peter Railton is associate professor in the Department of Philosophy at the University of Michi-
gan
55
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56
BENEFIT-COSTANALYSIS AND WELFARE
play a role. The second part of the paper deals with the notion of utility
that might lie behind the economist's appeal to preferences in social policy
assessment, and the relation of this underlying notion to those of price and
willingness to pay. Of special interest is how diminishing marginal utility
affects the use of prices to measure willingness to pay. The third part of
the paper looks at the question of measuring costs and benefits that will
arise in the future. This section argues the need for a distinction between,
on the one hand, discounting future prices or willingness-to-pay indicators,
a procedure that may be necessary for the accurate measurement of future
costs and benefits, and, on the other hand, discounting future utilities them-
selves, a procedure that may lead to systematic mismeasurement. By way
of conclusion, the paper suggests a role for benefit-cost analysis in high-
lighting future utilities that would otherwise lack adequate representation
in the present. In contrast to its reputation as a threat to intergenerational
justice, benefit-cost analysis could in virtue of its commitment to accuracy
in measurement-provide information that would make it uncomfortable
for policy makers to ignore intergenerational inequities.
I have been asked to contribute a philosopher's perspective to the
assessment of benefit-cost analysis. My hope is that this paper engages con-
structively with the practitioner's concerns in raising the question, "What
do I have to believe?" I should, however, emphasize at the outset that my
suggestions come from the standpoint of an outsider to the theory and prac-
tice of henefit-cost analysis without the advantages-and disadvantages of
~ 7 0
close involvement in the state of the art.
I should emphasize, too, that I am an outsider to the politics of
environmental regulation. In particular, I am unable to address the question
of whether benefit-cost analysis is a Trojan horse for a particular political
tendency in environmental policy. If that currently is where the real issue
over the utilization of benefit-cost analysis lies, then this paper is an exercise
in naivete and I might be compared to a loyal but benighted citizen of ploy
who offers the Greeks advice on how best to paint their gift.
Finally, I should also emphasize that I make no attempt to survey the
full range of moral and philosophical issues that surround the justification
of benefit-cost analysis, but instead focus almost entirely upon certain
questions related to the measurement of benefits and costs. I have chosen
this focus for a particular reason: if benefit-cost analysis fails in its job
of measurement, then its greatest claim to the attention of those involved
in environmental regulation its capacity to provide information about
the relative magnitude of a wide range of disparate benefits and costs,
some of which might otherwise receive little notice or quite arbitrary
treatment will become too weak to Justin consideration of its use. As
I hope to indicate, however, benefit-cost analysis may be able to do a
reasonably good job of measurement if those applying it are explicit about
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PETER RAILTON
57
the difficulties involved and if they adjust their claims about the decisiveness,
accuracy, and comprehensiveness of its assessments to the reality of its
limited measurement techniques.
SCOPE AND COMPREHENSIVENESS
To carry out benefit-cost analysis, what must an individual believe about
its scope? The short answer to this question is, "Very little, if one puts it
only to very little use." In contrast, if a person thinks benefit-cost analysis
can be a powerful tool of policy assessment, then he or she must have fairly
powerful beliefs about what can come within its scope.
Let us consider, for example, an extreme position that is probably held
by very few people: benefit-cost analysis affords the appropriate normative
criterion for social choice. To believe this, one would have to believe that
all the benefits and costs relevant to the assessment of policies can be
satisfactorily accommodated within benefit-cost analysis.
How hard would it be to believe that? Benefit-cost analysis is founded
on the idea of a potential Pareto improvement, that is, a change in which the
gainers benefit sufficiently to be able to compensate the losers and still come
out ahead. How might this standard which is usually seen as capturing an
idea of efficiency-provide the appropriate normative criterion for social
choice? The clearest rationale would probably run as follows. Changes
meeting this standard can be thought of as enlarging the total pool of
benefits that are socially available. If certain complications are ignored and
if population remains constant, and moreover if it is assumed that over time
the benefits and burdens of social policies tend to be distributed randomly
among individuals, then, when policies are implemented that all satisfy a
standard of potential Pareto improvement, the expected value of all social
positions will tend to rise. This rationale comes close to capturing a classical
utilitarian standard of social choice (because overall utility increases if the
expected value of all social positions rises). More surprisingly, it comes
close to capturing a hypothetical contract standard of social choice because
rational individuals who are concerned about advancing their own well-
being will tend to prefer social arrangements with higher expected utility
per position. Because hypothetical contract theory and utilitarianism are
the two dominant philosophical trends in the theory of social justice, it
might be argued that reliance on a potential Pareto improvement standard
would be consistent with promoting justice in well-recognized senses.
Yet this argument does not really make it easy to believe that benefit-
cost analysis gives an exhaustive account of the values that are relevant to
normative social choice even the single value of justice. In the first place,
this approach assumes that benefits and burdens are randomly distributed;
in the absence of further argument, however, it is hard to believe that this
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BENEFIT-COST ANALYSTS AND WELFARE
condition will be met so reliably that distribution in particular cases or
in cumulative patterns need not be considered. After all, the standard of
potential Pareto improvement says nothing about existing inequalities, and
there is no guarantee that changes that would meet the standard would not
bring about arbitrarily large increases in inequality. Serious normative wor-
ries might therefore arise for distribution-sensitive conceptions of justice.)
In the second place, the standard says nothing about whether the present
distribution is in any sense deserved, and there is no guarantee that changes
that would meet the standard would not allow gains or losses to go to in-
dividuals who did not earn or otherwise deserve them. Serious normative
worries might therefore arise for desert-based conceptions of justice. Even
if one were to suppose that many potential Pareto improvements would be
compatible with desert or equity, some would not be. Thus, on the basis
of most conceptions of justice, the benefit-cost standard could not be an
adequate criterion of normative social choice.
It seems to me that most theorists and practitioners of benefit-cost anal-
ysis recognize these limitations and do not advocate the use of benefit-cost
analysis as a sufficient condition for policy approval. It is not uncommon,
however, to hear benefit-cost analysis put forward as a necessary condition
for approval, a preliminary "test" that policies must meet before further
tests (of equity, desert, and so on) can be applied. Yet reasonable demands
of equity or desert may sometimes require changes of a kind that would
not pass a potential Pareto improvement test. For example, redistribution
designed to remedy past injustices might not yield more for the gainers
than it costs the losers; still, the gainers might deserve the change, and
equity might be served by it. In a society in which past injustices call for
such remedies, to restrict social choice to policies that represent potential
Pareto improvements would be to decide, in effect, against these demands
of desert or equity.
A defender of benefit-cost analysis might respond to these consider-
ations by suggesting that the scope of benefit-cost analysis be enlarged to
encompass all normatively relevant features in social choice. One way to
accomplish this would be to identify people's willingness to pay for equity
or desert. Yet surely, the question policy makers face is not simply `'How
much do our constituents care about whether things are just by their own
lights?" but also "What Is justice what does it require?" However useful
it may be to know the answer to the former question in order to answer
the latter, the former cannot entirely replace the latter. In many cases,
considerations of justice appear to function not as factors or weights within
1 Such conceptions include not only hypothetical social contract theory of the Rawlsian variety
(see Rawls, 1971) but also classical utilitarianism, which, owing to diminishing marginal utility,
is also distribution sensitive. This question is discussed in the second section of this paper.
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PETER RAILTON
59
benefit-cost analysis but rather as constraints on the proposals that are pre-
pared for such analysis. A benefit-cost analysis of the regulation of a toxin
does not even consider such cost-cutting options as massive government
deception about health effects or refusing to offer health care to individuals
of certain races. A utilitarian might argue that such alternatives need not
be analyzed because people are already convinced that they are contrary to
maximizing social benefit. A Kantian, on the other hand, might insist that,
regardless of whether social benefit is maximized, the government should
not deceive or discriminate in these ways. These viewpoints constitute two
poles of a substantive debate about the foundations and requirements of
justice. Fortunately, it is not necessary to resolve this debate, or even enter
into it, in order to carry out benefit-cost analysis that is, as long as a
benefit-cost standard is not treated as the appropriate normative criterion
of social choice.2
If a benefit-cost standard is not seen as a necessary or sufficient
condition of social choice, how, then, should benefit-cost analysis be viewed?
It might be used as an information-yielding device, a way of generating and
bringing together within a quantified scheme a great deal of data about
how people are likely to be affected by alternative policy choices. Both
utilitarians and contractarians consider it important to know how policies
compare with regard to the sorts of benefits that benefit-cost analysis is best
equipped to measure. For example, if a policy appears to be consistent
with the constraints of justice and yet is found to be inefficient, or not
cost-effective, or suboptimal with respect to aggregate expected value,
that information will be viewed as normatively relevant by utilitarians and
contractarians alike. One need not take sides in a controversy over the
theory of justice to assign considerable importance to the information
yielded by benefit-cost analysis in social decision making.
Viewing benefit-cost analysis as an informationyield~ng rather than a
decision-making device has implications for how such analyses should be
presented. For example, a benefit-cost analysis will be more informative
(although less decisive) if it reports disaggregated as well as aggregated
effects- for instance, by telling policy makers which elements within the
population will receive which costs and which benefits. If benefit-cost
analysis is to help policy makers to choose justly, and if justice is distribution-
or desert-sensitive, then disaggregated information may at times be more
crucial than overall net results. Similarly, a benefit-cost analysis will be
more informative (although less conclusive) if it refrains from collapsing
2 Some approaches (e.g., Ben-David, Kneese, and Schulze, 1979) have sought to capture these
competing conceptions of justice within something like a benefit-cost framework. These attempts
come to grief, however, in their inability to achieve an adequate representation of a fundamen-
tally deontological theory of justice. The agent-centered constraints of such theories may simply
lack a non-agent-centered, or global, value-theoretic expression.
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BENEFIT-COSTANALYSIS AND WELFARE
all uncertainties and reports error bands or sensitivities rather than point
measures. There are risks to justice that are every bit as significant as risks
to health; it is surely a matter of justice how much of such risk governments
should permit. It may be tempting to practitioners of benefit-cost analysis to
see their real goal as a grand sum; it may also be tempting to policy makers
to say to analysts, "Look, just tell me: what's the bottom line?" perhaps in
the hope that this figure will somehow decide difficult questions of justice
for them. Such temptations should be resisted, however, if benefit-cost
analysis is to play its appropriate role in policy deliberations.
Thus far, the discussion has centered on possible justice-based con-
straints on benefit-cost analysis without singling out any particular concep-
tion of justice. Such generality seems appropriate: because there is genuine
controversy over the nature of justice and what it requires, it would be in-
appropriate to consign to an analytic technique the task of deciding which
social outcomes are to be sought in this country.3
Surprisingly, the range of conceptions of justice that would accord a
significant role to the sort of information produced by benefit-cost analysis
may be even broader than has thus far been suggested. There may be
such a role even within the conception of justice that seems most opposed
to social aggregation and balancing: Lockean natural rights theories (e.g.,
Novak, 1974~. According to the more extreme forms of such theories,
individual rights in person and property are natural rights of exclusion
existing apart from social arrangements and constraining permissible social
policy by setting up normative boundaries that cannot be crossed without
the consent of the owner. Thus, for example, if the government were
to allow dust and diesel fumes from the building and operation of a new
intercity rail line to drift, unbidden, onto private property, then the integrity
of that property would have been violated. It would be no defense, in this
view, for the government to argue that the aggregate benefit realized from
the new rail line would exceed the aggregate cost it would impose. A
Lockean natural rights conception of justice, is disaggregative, since each
individual is entitled to say what can and cannot cross his or her properly
line. In the example, if a given individual does not want the benefits or
burdens of the new line, then the government is not free to send its dust
and fumes onto his or her property, however beneficial the line might be to
society as a whole. If control of all dust and fumes would be prohibitively
expensive, then private property rights may stand in the way of building the
line at all.
3 even a utilitarian might justifiably believe that the proper role for benefit-cost analysis is in
providing information rather than in decision making because a great many factors influencing
direct or indirect utilitarian assessment are not well captured by the specific analytic techniques
of benefit-cost analysis.
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PETER RAILTON
61
Of course, were the government to secure the voluntary consent of all
those whose property boundaries would be at risk of violation, construction
could proceed. Given the nastiness of dust and diesel fumes, individuals
presumably would demand some compensation in return for their perm~s-
sion. With person and property at stake, individuals would be entitled, on
a natural rights theory, to hold out for whatever they could get even to
refuse to consent at any price. As a result, a single individual could wield
veto power over a scheme of wide-ranging social benefit, and this would
give rise to perverse incentives. Individuals could wait until the government
obtained near-unanimous consent to some beneficial scheme, and then hold
out for compensation much in excess of any harm they might themselves
bear.
Yet the constraints of individual veto power and its perverse incentives
might be removed if it were possible to go ahead with the beneficial scheme
and then provide after-the-fact compensation to all whose property had
been adversely affected. This way of proceeding would not allow individuals
to set their own levels of after-the-fact compensation, lest they demand
arbitrarily large sums and in that way continue to exercise an effective
veto. Instead, some fairly objective measurement of the extent of harm
to individuals would be established so that commensurate compensation
could be determined. The test of potential Pareto improvement addresses
just this sort of measurement problem, although its application within a
Lockean scheme would have to involve actual rather than merely possible
compensation. This requirement in turn would mean including transaction
costs in the assessment. Once that were done, however, a policy or activity
that appeared to be a potential Pareto improvement could be pursued
under this violate-and-compensate gambit.4 Thus, a government-or, for
that matter, individuals would be greatly interested in receiving the sort
of information that benefit-cost analysis could provide using a framework
of actual compensation.
From a philosophical point of view, it is not clear whether those whose
fundamental sympathies are Lockean should be happy with the v~olate-
and-compensate gambit, for it may be incompatible with full respect for
individual property and consent. Yet a Lockean scheme without this gambit
might result in so many inflexibilities as to disqualify it for any actual
application. In the modern interconnected world, it is simply not possible
to secure actual consent to all impositions of risk or to refrain from all
risk-imposing activities. Indeed, even with the gambit, the Lockean scheme
would be extraordinarily cumbersome, owing to the problem of identifying
4An example of this approach is eminent domain. It prevents individuals from exercising veto
power over public projects or extracting exorbitant sums in exchange for giving their consent,
and it involves compensation lay some objective standard.
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BENEFIT-COST ANALYSTS AND WELFARE
and appropriately-compensating all actual victims.5 For now, however,
it is sufficient to note that Lockeans who are concerned with real-world
applications are bound to seek something like this sort of flexibility and that
for such purposes it would be important to have the sort of information
about relative magnitudes of harm and good that benefit-cost analysis may
afford.
In sum, individuals with various perspectives on justice may find the
information produced by benefit-cost analysis to be greatly valuable. Once
benefit-cost analysis is understood as a process meant to yield information
rather than to make decisions, practitioners of benefit-cost analysis need
not take sides in controversies over the nature of justice. At the same time,
it would be quite controversial-indeed, it would almost certainly amount
to taking sides against widely held deontological conceptions of justice to
attempt to assimilate the theory of rights into a benefit-cost framework by
assigning monetized costs to violations of rights and then entering such costs
into an aggregative, balancing scheme. In a range of cases, it would seem
that rights are better understood either as (a) constraints upon the possible
projects whose costs and benefits decision makers are prepared to assess
by analytic means or, more weakly, as (b) markers of areas of special social
concern in which policy makers are uncomfortable with a straightforward
balancing of costs and benefits. Either way, decision makers will want to
give the issue of rights a distinctive role In their deliberations and not blend
such considerations into a homogeneous mixture of costs and benefits.6
MEASURING COSTS AND BENEFITS
AT PARTICULAR POINTS IN TIME
What does an individual have to believe he or she Is measuring when
performing benefit-cost ana~szs? I have been pursuing the idea that benefit-
cost analysis should be seen as an information-yield~ng process. What, then,
does benefit-cost analysis provide Information about, and how accurate can
it be?
One view on this matter has already been called into question, namely,
the view that benefit-cost analysis provides an assessment of the relative
normative weight of all considerations, including all matters of justice or
rights. It seems to me much less implausible to believe that benefit-cost
5Nozick (1974) considered adding such a gambit to Lockean theory, although he also showed
some preference for using a system of tort law to carry out compensation. For further discussion
of risk and Lockean theory with or without the gambit see Railton (1986b).
6 I should perhaps emphasize that this claim does not depend on rejecting a utilitarian analysis
of rights. It is an open question whether the system of rights considered optimal by a utilitarian
would permit various sorts of balancing in public policy making. The optimal system of rights in
the long run might be one that imposed some fairly strict limits on balancing.
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PETER IUILTON
63
analysis finds its proper subject matter in the realm of welfare. This view
might seem to run counter to the orthodox conception that benefit-cost
analysis is based solely on the notion of preference. Yet why, when social
policy is being chosen, do decision makers think that costs and benefits
based on individual preference have any special relevance? Why not look
to some less "subjective" measure? The usual answer involves the principle
of consumer sovereignty: other things being equal, policy makers should
respect the individual's judgments about what matters to him or her and
how much it matters. This principle is not a piece of democratic theory,
to the effect that "the people shall judge." For example, the principle of
consumer sovereignty is applied to preferences but not to beliefs. Benefit-
cost analysts seek out expert opinion on the likely effects of risly activities
on the environment or on human health; they feel no compulsion to base
their estimates of the probability of outcomes on some average drawn from
popular opinion. Why, then, do they seek to base their estimates of the
utilities of outcomes on individual judgments?
The answer presumably is that, although the public believes that sci-
entists are more knowledgeable than the average American about natural
phenomena, it does not believe that, in general, a group of experts would
be more reliable than any given individual in ascertaining the extent or
nature of that individual's welfare not, at least, once that individual was
informed about the options he or she faced. Scientists have the most sus-
tained and most detailed experience of the natural world, but individuals
have the most sustained and most detailed experience of how choice and
outcomes affect their particular well-being. This answer would also explain
why the principle of consumer sovereignty is applied to the preferences of
adults rather than children. If individuals learn about the nature of their
well-being through experience, and especially the experience of choice, and
if moreover adults in general have better information about the options
they face than do children, then the opinions of adults are more likely to
be accurate.
By contrast, if one were simply an outright skeptic about the notion
of welfare or about the possibility of learning about one's own good,
there would be no clear rationale for giving more credence to the opinion
of a given person than to the opinion of some randomly selected third
party about the effects of a given social policy on that individual's well-
being. In addition, there would be no clear rationale for granting informed
preferences more authority than uninformed ones. The most plausible
way to provide such rationales, and thereby to underwrite the theory and
practice of benefit-cost analysis, is to believe that there is such a thing as
individual welfare and that individuals do a better job of recognizing it in
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BENEFIT-COSTANALYSIS AND WELFARE
their own case than do third parties, especially when individuals are well
informed.7
It may be somewhat unfashionable to speak in such terms. At times,
it seems that, some contemporary economists wish to see no more in the
notion of preference than the mere fact of consumer choice among bundles
of goods. Yet unless one believes that behind choice lies an effort by
individuals actually to achieve their goals, it is unclear why choice behavior
even warrants the term preference. It certainly becomes problematic to
determine how choice behavior could be a basis for deciding whether
and to what extent individuals have received benefits, borne costs, or
undergone compensation. What relevance would benefit-cost analysis have
in normative policy making unless it was believed that preference and
willingness to pay tended to reflect real gains or losses to the quality of
individual lives?8
Perhaps the concept of well-being has been out of favor in economics
circles because well-being, unlike behavior, is not publicly observable.
Yet there is nothing inherently unscientific in positing the existence of
unobservables whether electrons or viruses or utilities to organize and
explain observation, as long as one is also responsive to evidence. Indeed,
there is something especially odd about calling well-being "unobservable";
unlike an electron, it is something of which each person has had the most
intimate experience. Furthermore, given the similarities among all human
beings (e.g., they are all made of flesh and blood), it seems idle to ~mag-
~ne vast differences In the range and character of the inner lives of those
whose environment and behavior are broadly similar. Indeed, this worry
Is really closer to metaphysical skepticism about other minds than to the
methodological concerns of scientific psychology.9
7In their defense of benefit-cost analysis, Leonard and Zeckhauser (1986:35) put forward "the
basic tenet that people know what is good for them," based on "the assumption that agents
are well informed." For a philosophical defense of a conception of individual good based on
something similar to informed preference, see Railton (1986a).
Tithe question of factors other than individual welfare that influence preferences (e.g., social
values, posthumous goals) is considered later in this paper.
9These remarks suggest a reply to die-hard positivists. Even classical behaviorism has availed
itself of the notions of positive and negative reinforcement, aversion, satiation, expectation, and
so forth, lay giving them operational definitions. At least one strain of revealed preference theory
seems to treat preference in a similarly operationalist way. Questions about whether a given
choice really reveals an individual's preferences are blocked lay pointing out that this definition
simply follows from the stipulation of what "revealed preference" is to mean. Is there any reason,
then, why the positivist should not consider operationalizing the notion of cardinal utility by tying
it to specific patterns of behavior perhaps along with physiological evidence concerning, say,
galvanic skin response and pupil dilation? If the objection is raised that it is difficult to see
the interest, for purposes of social choice, in working with such a concept of utility unless it
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PETER RAILTON
65
Let us say, then, that the best case to be made on behalf of the rele-
vance of benefit-cost analysis to normative social choice is that it provides
systematic information concerning the extent to which a person's well-being
will be affected by alternative policies. In principle, benefit-cost analysis
is able to provide this sort of information because it attaches monetized
values to the benefits and costs experienced by different individuals and
therefore permits comparison and aggregation. In this respect, it resem-
bles a Benthamic felicific calculus. The mechanism for the assignment and
comparison of values differs from Bentham's, however, because the test of
a potential Pareto improvement appears to involve no appeal to interper-
sonal comparisons of cardinal utility.~° Let us suppose, for example, that
Mr. Smith could receive benefit B only if risk R were imposed on Mr.
Jones. Yet suppose as well that Jones is indifferent regarding the choice
between continuing the status quo and bearing additional risk R while re-
ceiving compensation $C; suppose, too, that Smith is indifferent regarding
the choice between continuing the status quo and receiving benefit B at
a cost to him of $D. If $D is greater than $C, imposing risk R to bring
about benefit B passes the potential Pareto improvement test. Smith gains
enough to compensate Jones although it is not assumed that he actually
does so-and still come out ahead.
It should be -noted, however, that the choice behavior just mentioned
was described in the language of indifference, benefit, cost, and compensation.
Were one to discover that the behavior of Jones, which underlies the
imputation of indifference, was the result of real or imagined intimidation
by Smith or, alternatively, of a simple misunderstanding of what was being
asked of him, then his behavior would not support an interpretation in
such terms (indifference, compensation, etch. Moreover, if these terms
did not fit, it would be difficult to believe that the test revealed anything
interesting about gains or losses in well-being. 1b take the test of potential
Pareto improvement seriously for purposes of social choice, it is necessary
to believe that the sorts of choice behavior on which the assessments are
based can be plausibly interpreted as reflecting the choosers' views about
how their well-being is likely to be affected.
Now, the real question of this section can be posed: Under what
circumstances will a test of potential Pareto improvement reliably be infor-
mative about net effects on well-being? Obviously, it is necessary to ensure
as far as possible that the parties to the choice behavior in question are
neither in reality nor in their imagination being coerced and that they are
corresponds to something less stipulative, I will gladly concede the point- at least so long as it is
recognized that the objection arises with equal force against revealed preference.
10 Whether, in a sense, the test actually involves a form of interpersonal comparison is discussed
later.
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BENEFIT-COST ANALYSTS AND VVELFARE
support for various sorts of environmental policies-is used evidence for a
willingness to pay.
Epically, as in the case of cognitive defects, there will be indirect
welfare effects of such preferences. For example, if I very much want a
wildlife area to be protected, then I prefer not to hunt there, and I also
prefer that no one else hunt there. Should I learn that people are hunting
there, I would be disturbed in a way that affects my well-being. Such indirect
welfare effects are a genuine part of any calculation of social welfare, even
though their basis lies in other-directed preferences. This approach is to be
distinguished from one that gives other-directed preferences a direct role
in utility assessment (because arguably, apart from my agitation on learning
of hunting in the preserve, my welfare is not affected adversely by the mere
fact that hunting is occurring).
If such indirect welfare effects were- always of the same magnitude
as direct effects on preference fulfillment, it would be possible to ignore
the question of whether a given willingness-to-pay indicator reflects self-
or other-oriented preferences. It is impossible to believe that these effects
will be that similar, however. For example, my willingness to pay for some
benefit may reflect preferences I have about how things will go after my
death. Once I am gone, however, the extent to which this preference is
satisfied can be affected although my welfare cannot.
If the goal in such cases is to assess gains and losses in individual
welfare, analysts will be misled to some degree by looking at individual
preferences. And yet such a widened scope of interest does not create a
fundamental tension with the doctrine of consumer sovereignW. The basis
of the doctrine of consumer sovereignty is the individual's reliability to judge
his or her own well-being; in the above instance, preferences regarding other
matters are being considered. Thus, some adjustment in the interpretation
of choice behavior may be called for whenever other-directed preferences
can be expected to play a large role. This approach does not at all
preclude the measurement of indirect welfare effects, although it requires
some attention to the sorts of preferences that are consulted when assessing
such effects. Careful analysis would avoid amalgamating other-directed and
personal-welfare-based preferences.
18It may not seem quite so Philistine to endeavor to exclude other-directed preferences from di-
rect consideration in benefit-cost analysis once one recognizes the limited, "welfarist" purpose of
benefit-cost analysis and once one notices that the values that other-directed preferences reflect
quite properly play a significant role in actual policy choice. However, the charge of philistin-
ism may stick to anyone who insists upon treating benefit-cost analysis as the decisive normative
criterion of social choice.
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73
The Absence of Appropriate Markets
~ believe that benefit-cost analysis can achieve a reasonable degree of
accuracy in its information-yielding role, one must believe that the process
is able to contend with those benefits that are important to welfare but that
have no existing appropriate markets. The welfare of individuals is much
affected by many features of the world for example, the aesthetics of daily
life, the degree of community enjoyed for which it is difficult to produce
direct w~llingness-to-pay measures.
I\vo approaches come to mind. First, an analyst might give quantitative
measures only for those benefits for which an appropriate market exists and
note explicitly the incompleteness of the analysis. One way to accomplish
this is illustrated by Porter's benefit-cost analysis of mandatory deposits
on beverage containers (Porter, 1978~. A major benefit that could result
from a container deposit law would be a reduction in litter, with attendant
aesthetic gains, an increase in community pride, and so on. How is one
to give a monetized value to such benefits, however? Porter wisely does
not try; instead, he carries out a sensitivity analysis that indicates a range
of willingness-to-pay values, within which one's willingness to pay for these
difficult-to-quantify goods would have to fall in order to outweigh the
estimated costs of the deposit system.
A second approach attempts to find or create some proxy market or
other indirect way of assigning a quantitative measure. Per capita govern-
ment expenditures on litter removal, for example, might be considered as
an indicator of willingness to pay. The danger of this approach is its arbi-
trariness; the danger of the first approach is that nonquantifiable benefits
may simply drop out of sight in favor of those that can be more readily
measured.
One advantage of the second approach is that it may hold "soft"
(difficult-to-quanfily) benefits before the public eye and even stimulate de-
bate over their magnitude and how best to measure them. In any event, the
second approach will be needed even for the "hard" benefits that are segre-
gated out by the first approach because actual markets involve externalities
and therefore their prices may need adjustment. The problem of exter-
nalities, it need hardly be said, is particularly acute in the environmental
case. For example, Porter measures disposal costs for solid wastes simply
by looking at what cities were paying per ton in the 1970s to have refuse
hauled to the landfill and buried. A fuller accounting, however, would
also consider what is now painfully evident: the limited space available
for the purpose of solid waste disposal and the long-term costs of filling
that space with nondegrading bottles and cans. Moreover, Porter's analysis
looks at energy consumption in container production versus consumption
in container recycling (because this measure is fairly readily gauged), but
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BENEFIT-COST ANALYSIS AND VVF-LFARE
it ignores the resulting levels of pollution from production rather than
recycling, the comparative environmental degradation in obtaining raw ma-
terials, and so on. These external factors are difficult to quantify and in
any given case may be of little significance. The point is that they are easily
overlooked even in very careful analyses, so that it is potentially misleading
to summarize the results of such analyses as one-dimensional acceptance
and rejection zones for policies. A legislator may believe he is looking at
hard facts when he faces a $27 per year per citizen value of litter reduction
necessary to make the deposit law a net benefit. In reality, he is looking at
the easy facts- the ones most amenable to quantification. The reliability of
an analysis should not be measured by how much its monetized values rely
directly on market prices because the prices themselves may not reflect the
true costs of a specific benefit.
A third approach may help remedy some of the problems of the
first two: environmental policy might deliberately be used to reshape the
boundaries of markets and to internalize external costs. This approach
might involve a fairly elaborate governmental role in structuring some
markets, but it would permit the use of market mechanisms to determine
prices. Governmental intervention, then, is not always the enemy of a free
market approach.
Within the realm of individual welfare, quantification of certain central
benefits-for example, the aesthetic or social qualities of the environment
within which one lives or works may always elude analysts, even in cases
in which market mechanisms have been modified to include externalities.
Either the policy analyst must believe that these difficult-to-quantify con-
tributors to welfare can be ignored perhaps because they tend to cancel
one another out, although this would be hard to believe in general-or
he or she must be committed in advance to building many caveats into
the final benefit-cost assessments and to bringing many more qualms and
considerations directly to the attention of decision makers.
The five sources of possible inaccuracy that have been discussed-
diminishing marginal utility in the intrapersonal case, diminishing marginal
utility in the interpersonal case, preferences involving poor information or
other cognitive defects, preferences not related to welfare, and the absence
of appropriate markets-are all subject to some degree of correction,
and this fact suggests something about how benefit-cost analysis might be
improved as a measure of individual welfare. Of course, to take these
difficulties seriously, it is necessary to take the notion of individual welfare
seriously.
Economists sometimes air rather skeptical views about the concept of
well-being, and one evident effect of such skepticism is to promote impa-
tience with efforts to look closely at how adequate one measure of utility
might be in comparison with another. I do not think that methodological
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PETER RAILTON
75
or philosophical considerations require such skepticism, and as far as I can
see the best case for defending the normative relevance of the enterprise
of benefit-cost analysis depends in the end on rejecting it. It may be a
deep-seated fact rather than a mere heuristic that microeconomics texts
tend to begin with cardinal utility theory and to retain the vocabulary of
utility even in the brave new world of ordinalism.
It would be possible, given the desire, for the government greatly to
reduce the mystery about utility by greatly increasing the support given
to experiments aimed at providing better information about well-being, as
perceived through the lens of choice. Moreover, it would be possible, given
the desire, for the government greatly to increase the support given to
basic social and psychological research and to research into the toxicity
or carcinogenicity of various chemicals, the behavior of substances in the
atmosphere or the soil, the medical consequences of social dislocation,
and so on. The United States justifies a vast military budget by pointing
to the dangerous possibility of being caught unprepared. Yet even as I
write, this nation is in danger of being caught unprepared in the realm
of environmental policy making. At bottom the problem may not be the
difficulty of doing good research on relating utility to willingness to pay but
rather an unwillingness to pay for research with considerable utility. No
doubt, this unwillingness is another example of a cognitive defect.
MEASURING COSTS AND BENEFITS OVER TIME
What does one have to believe to discount future costs and benefits?
One concern that must be addressed if preferences are to be corrected
for informational or cognitive defects is the fear that such correction will
in fact result in a particular portion of the total population in this case,
technocrats substituting their preferences for those of the population at
large. Yet the very same sort of concern arises from certain uses of in-
tertemporal discounting. For example, the use of intertemporal discounting
is sometimes justified by pointing to a "social time preference"-people,
it is said, prefer to have a given benefit occur sooner rather than later.
(This phenomenon is not entirely uncontroversial, either as a descriptively
or as a normative matter, but let us assume it for now.) People alive today,
then, will prefer benefits in the present. By symmetry, people of the future
will prefer benefits in the future, which is their present. Thus, if existing
time preferences are used to discount the benefits and costs of a social
19For example, people continue to set aside savings even when, as has often been the case in
recent decades, the real after-tax rate of interest on savings is indistinguishable from zero (Lied,
1982:84~. However, since people save for various reasons, one should be somewhat skeptical of
using saving behavior too directly as a measure of time preference.
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BENEFIT-COSTANALYSIS AND WELFARE
policy with long-term consequences, benefit-cost analysis will, in effect, be
assessing the overall value of a policy by substituting the preferences of a
particular portion of the affected population those who are alive in the
present-for the preferences of the population at large.
The above is not in itself a complaint of intertemporal injustice, al-
though it could easily become the basis for such a complaint. Instead, the
complaint is, in the first instance, one of mismeasurement, of failing to take
into account the preferences of many of those on whom the consequences
of the policy will fall. It is as if the costs and benefits of a national ambient
air standard could be assessed only by consulting the preferences of those in
Kansas. Indeed, the mismeasurement is worse than that because the time
preferences of those alive in the present are not unlike, say, those living
in Kansas~ven approximately representative of the time preferences of
all those affected by the policy. People tend to show a fairly strong prefer-
ence that benefits be received within their lifetimes, with costs postponed
until sometime in the future. The comparison therefore should be with
measuring the value of a national standard on acid rain by consulting the
preferences only of those in the Ohio Valley.
Still, it might be argued that this comparison is misleading. If persons
who are alive today are saving at an optimum rate, as they should be in an
ideal market, then the welfare of future generations will be assured through
economic growth. This situation is quite different from one in which people
in the Ohio Valley benefit from cheap power while inflicting net losses on
those downwind of them. Thus, the interests of future generations are not
really being left out of account if people act on existing time preferences.
I would like to draw attention to two features of this rationale for
following current time preferences.
When Saving Is Optimal
First, this rationale does not involve the discounting of future utilities.
Under conditions of optimal saving, if people who are alive today were to
ignore their own time preferences and force themselves to invest more and
consume less, the total amount of consumption that everyone will enjoy
over time would be reduced. This efficiency-based argument is temporally
neutral; it functions to show that there is no real inconsistency in practice
between, on the one hand, making decisions about consumption versus
investment based on social time preference, and, on the other, counting all
welfare effects equally, whenever they occur.
What role would discounting play in such a schemed Because future
generations are assumed to be more prosperous than those alive today,
HI am indebted here to Allan Gibbard's comments on the original version of this paper.
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PETER RAILTON
77
they will be willing to pay more (in constant dollars) to receive a given
benefit or avoid a given harm. Yet these higher, time-indexed, willingness-
to-pay indicators will not reflect comparably large gains in utility, owing
to the diminishing marginal utility of money. Discounting must be used
to telescope these higher figures in a way that permits comparability with
present willingness-to-pay indicators. This approach avoids the overestima-
tion of future costs and benefits, which could result in mismeasurement of
the relative value of competing policies that differ in terms of when their
costs and benefits will obtain. From the standpoint of the present, a future
monetized measure can be discounted to solve a problem of intertempo-
ral comparison and obtain an accurate portrait of effects on utility over
time. Once again, it is apparent that no discounting of future utilities- as
opposed to prices-is involved.
Such discounting of monetized measures for the purpose of intertem-
poral comparison should presumably take as its rate not the real rate of
economic growth but rather the rate at which the marginal utility of money
is declining as such growth occurs. This rate can be estimated only roughly
and, owing to disparities of wealth, will represent only an average within
a population. Presumably, however, the upper bound is the real rate of
economic growth because even at high finite levels of wealth, additional
dollars will continue to have some positive utility. If growth is taking place
and wealth differentials are not increasing, the lower bound will be zero.
Thus, when discounting is used for the sake of intertemporal comparison,
the usual rates employed in benefit-cost analysis, which often exceed the
real rate of growth of the economy, are much too high and would be
expected to yield systematic undermeasurement of future gains and losses.
Discounting for purposes of intertemporal comparison only makes
sense if one is operating with time-indexed willingness-to-pay indicators.
A similar effect could be achieved by using present willingness-to-pay
indicators for future costs and benefits and then- not discounting.2i Disaster
occurs, however, when one mixes these two strategies and uses present
willingness-to-pay indicators for future costs and benefits and then also
applies discounting. This approach produces the astonishing result that,
after a few years, the outcomes of policies, no matter how harmful or
beneficial, have almost no measured welfare effect. Such a result is hardly
credible, for it would imply that it will not matter to people in the not-too-
distant future how life goes for them.
It is possible that legislators or administrators who ask for benefit-
cost analysis want nothing more than a measure of effects on the welfare
21The result may not be quite the same, however, because it is possible that, on average, mem-
bers of future generations, owing to their higher standard of living, will receive more utility than
members of generations alive today from, for example, a year of life.
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BENEFIT-COST ANALYSIS AND WELFARE
of people alive today. It is also possible that, if benefit-cost analysis is
performed in a climate of optimal growth, no real underrepresentation
of future utility will result. Still, the function of benefit-cost analysis, as
understood here, is to give the fullest possible accounting of welfare effects.
Such an accounting might simply confirm the view that, in practice, acting
on existing time preferences will not lead to policy choices that would
in effect underrepresent future utility. But one would want to see this
confirmation actually carried out.
This point brings me to the second feature of the rationale for following
existing-time preferences that I would like to discuss.
When Saving Is Not Optimal
Currently, there is a vigorous debate about optimal saving, and I am in
no position to judge it. Yet, it does seem difficult to find people who believe
that, once all externalities have been taken into account, present rates of
saving are optimal. Indeed, reflecting on the environmental problems of
toxic wastes, atmospheric pollution and warming, nonrenewable resources,
ozone layer depletion, and so forth, raises the real possibility that future
generations will be worse off than today's. It is simply not clear that the
economic growth made possible by rapid exploitation of the environment
will be great enough to enable future societies to make up the losses
connected with resource exhaustion and environmental degradation. 1b
effect widespread ecological damage is quickly and rather cheaply done,
but even the richest of societies do not appear to be able to afford to repair
this damage fully without severe economic burdens.
One might (were it not an understatement of the difficulty) invoke
what I am tempted to call the law of Styrofoam pellets, a special case of the
second law of thermodynamics: on a windy day it is the work of a moment
to send Styrofoam lentils all over hill and dale I need only open a packing
box and wave it aloft. ~ reassemble even nine tenths of the pellets in the
original box, however, would give someone a week's work.
The wholesome and optimal expansion of the economy cannot be taken
for granted. Without optimal saving and growth, the realm of operation
becomes that of the second best, where one can no longer be certain that
the effort to approximate an efficient solution in one area brings overall
efficiency closer. So, most bets are off. In particular, because it is no
longer safe to assume that people will be moving forever upward along
curves of increasing utility, decision makers cannot ignore the problem of
trying to gauge future utilities accurately in order to make comparative
assessments of policies. ~ follow existing time preferences and employ a
blanket discount function in the world of the second best is thus to adopt an
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PETER RAILTON
79
attitude that carries a considerable possibility of underrepresenting actual
welfare effects.
Competing environmental policies may differ greatly in regard to when
they impose costs and how they affect the relative scarcity of certain goods.
Although for practical purposes it may be necessary to limit how far into the
future costs and benefits are traced, some remote consequences of present
activity can even now be foreseen.22 I recall as a teenager being disturbed in
a way I could not quite express by a photo in the middle of an encyclopedia
article on radioactivity. It showed a sailor pushing concrete blocks off the
stern of a ship, and each block was full of highly radioactive waste. "The
concrete blocks are expected to last 100 years," said the caption cheerily.
Elsewhere in the same article, however, was the information that many of
the radioactive isotopes present in such blocks have half-lives of thousands
or millions of years. Policy makers can choose to make more or less sturdy
concrete blocks, to make more or less expensive storage facilities, or to
alter behavior so as to create more or less of the waste for disposal. The
alternatives presented in these choices may mean cheap waste disposal in
the present but an expensive or even irreversible problem in the future, or
expensive waste disposal In the present and a cheaper and more reversible
problem in the future. Benefit~ost analysis can help in determining the
long-run expected value of such choices-but not by engaging in blanket
discounting in a second-best world.
~ be -sure, discounting will be of use even so. One must, for example,
be sensitive to the opportunity costs of capital, to worries about displacing
investment, and to the compounding effects of taking benefits earlier rather
than later. Yet in all such cases, future costs and benefits must be measured
without actually discounting future utilities. Certain goods tend by natural
(or "natural") mechanisms to multiply over time rabbits and capital, for
example. Consequently, if one wants to Blow the quantity of such goods
that are needed on hand now in order to have some particular quantity
of them on hand at a given time in the future, something like a present-
value calculation based on the rate of increase can be carried out. This
calculation, however, will not reveal how much of this good should be
on hand at any particular future time, given present resources-that is
a question one must try to answer by asking what will be needed or
wanted, and how badly, at that time. This latter question supposes an
evaluative stance of temporal neutrality, reflecting commitment to a full
, in,
22Actually, such limits may be necessary for theoretical purposes as well. In general, an infi-
nite time horizon makes comparisons of costs and benefits impossible- both will simply grow
indefinitely. Still, a distant but finite time horizon, along with some further constraints about
foreseeable effects beyond that horizon (e.g., concerning something like the net rate of utility
growth) would do a much better job of representing future utilities than straight discounting at
any significant rate.
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BENEFIT-COST ANALYSTS AND WELFARE
accounting of welfare effects. Such neutrality is consistent with discounting
in regard to decisions about how best to deploy the "naturally increasing"
instrumentalities of welfare.
This mention of natural increase through productivity gains brings
the discussion to another wrong turn that may be taken in calculating
opportunity costs. Practitioners of benefit-cost analysis have rightly rejected
the idea that the value of a life is measured by its contribution to economic
production and instead have developed measures based on willingness to
pay. Such measures yield values that are seemingly more in line with
Intuitive views about the relative importance of life. Nevertheless, even
though a particular sum for example, $2 million is set as the monetized
value represented by a life, this value cannot be treated as if it were a $2
million investment. Suppose decision makers are asked to choose between
two policies, one of which emphasizes saving lives in the present while the
other emphasizes achieving some other benefit 10 years in the future. If
the monetized value of a life were a monetary asset, it should be possible
to calculate the opportunity cost of losing a life as opposed to saving it
by considering the return on $2 million. This kind of approach however,
would be misleading about the effects of saving a life in comparison with
other benefits. Monetization is a potentially useful way of valuing various
benefits for the purpose of comparison; it is not, however, a device for
turning all benefits into interest-bearing assets that carry the present value
of their monetized measure. It would be unfortunate if the hard-headed
practicality behind monetization were to yield to mystification just at the
point when its proper goal has been accomplished.
In sum, in this second-best world, decision makers cannot believe that
they are entitled to carry out blanket discounting of future costs and benefits
on the basis of an assumption that the welfare of future generations is being
adequately protected by the underlying productivity of the economy. Policy
assessment must endeavor to capture the actual expected long-term costs
and benefits of today's choices as accurately as possible, and to weight them,
using the~best available estimates of the probabilities of outcomes rather
than some uniform temporal discount. If measurement is to be consistent
and accurate, it must use the same criteria for people~alive in the future
and their well-being that are used for those alive today. If consumers are
sovereign, then they must be sovereign, whenever they come into being.
One of the rationales for benefit-cost analysis is market failure; without
optimal savings and growth, there can be no clearer example of market
failure than the failure of the preferences of future generations to enter
into the determination of prices today.
By providing a means by which to represent future preferences in
present calculations, benefit-cost analysis can allow decision makers to con-
front the actual effects their choice will have upon welfare in the future.
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PETER RAILTON
81
Thus, the use of benefit-cost analysis not only is a matter of accurate mea-
surement but could also involve the promotion of intergenerational justice
by giving voice to temporally absent preferences. Benefit-cost analysts
committed to a full accounting could become, in effect, representatives
of otherwise disenfranchised future generations. It remains to be seen
whether practitioners of benefit-cost analysis will seize on this- perhaps
unexpected-opportunity to plant their analytic banner on the moral high
ground.
ACKNOWLEDGMENTS
I would like to thank Allan Gibbard, Edward Green, Roger Noll,
Robert Solow, and Hal Varian for helpful criticisms of an earlier draft of
this paper. I am especially grateful to Hal Varian for suggesting useful
readings and for helping me to see how to frame some of the Issues I wish
to raise in terms that might be intelligible to economists. If I have failed in
this task, it is surely not his fault. I am also indebted to Douglas MacLean
for numerous helpful discussions and for bringing to my attention Page
(1977) and appendix F of Parfit (19841. both of which I found most useful
in writing this paper.
~ ,,
REFERENCES
Ben-David, Shaul, Allen V. Kneese, and William D. Schulze
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paper. Washington, D.C.: Resources for the Future.
Conservation Foundation
1987 Risk Management Case Study. Unpublished manuscript. Washington, D.C.
Leonard, Herman B., and Richard J. Zeckhauser
1986 Cost-benefit analysis applied to risks: Its philosophy and legitimacy. Pp. 31-48
in Douglas MacLean, ea., Values at Risk. Totowa, NJ.: Rowman and Allanheld.
Lind, Robert ~
1982 Introduction. Pp. 1-94 in Robert C. Lind et al., Discounting for Time and Rink
in Energy Policy. Washington, D.~: Resources for the Future.
Nozick, Robert
1974 Anarchy, State, and Utopia. New York: Basic Books.
Page, Talbot
1977 Conservation and Economic Efficiency. Baltimore, Md.: Johns Hopkins Univer-
sity Press.
Parfit, Derek
1984 Reasons and Persons. Oxford: Clarendon Press.
Porter, Richard C.
1978 A social cost-benefit analysis of mandatory deposits on beverage containers.
Journal of Environmental Economics and Management 5:351-375.
Railton, Peter
1986a Facts and values. Philosophical Topics 14:5-31.
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BENEFIT-COST ANALYSIS AND [YELF~4RE
1986b Locke, stock, and peril: Natural property rights, pollution, and risk. Pp. 89-123
in Mary Gibson, ea., To Breathe Freely: Risk, Consent, and Air. Totowa, N.J.:
Rowman and Allanheld.
Rawls, John
1971 A Theory of Justice. Cambridge, Mass.: Harvard University Press.
Sen, Amartya
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Philosophy 82:169-221.
l
Representative terms from entire chapter:
potential pareto
