Theoretical Foundations

Welfare-Change Measurement

The foundation of benefit-cost analysis (BCA) is welfare-change measurement: the benefit from some proposed action is the money-related welfare change that it generates. The concept of benefit is an increase in welfare, that is, preference satisfaction; and welfare change is measured in terms of money. Valid money measures of welfare change can be defined conceptually and can be estimated with reasonable accuracy, precision, and reliability; and individual welfare changes to arrive at social benefits and costs can be added up. Skepticism about any of those claims, in general or in the specific application to biodiversity, suggests that caveats should be applied to the interpretation of benefit-cost information or its use in policy decisions.

The conceptually valid measures of welfare change are willingness to pay (WTP) for benefits and willingness to accept (WTA) for costs. WTP is the amount of money that someone would willingly pay to get a desired good, service, or state of the world rather than go without; WTA is the amount of money that would induce someone to willingly give up the good, service, or state of the world. Those measures are readily defined in market terms—WTP is the buyer's best offer, and WTA is the seller's reservation price (the price at which the seller will hold rather than sell)—but they are by no means restricted to commodity markets. Some people are willing to pay substantial amounts of money for improvements in the quality of their life. Some would willingly accept a lower level of amenities if compensated with money; for example, some would willingly move to an undesirable location if promised a large enough pay raise.

For BCA of a policy proposal, aggregate benefits are defined as the sum of WTP figures for all those who stand to gain from the proposal. Aggregate costs are the sum of WTA figures for all who would provide goods and services or bear disamenities if the policy proceeds. Some critics object to aggregating benefits or costs that accrue to individuals, on the grounds that individuals with greater income and wealth tend to have greater WTP (or WTA) and that simple aggregation makes no attempt to correct for this or to place extra weight on things that benefit the disadvantaged.

Given that many proposals promise benefits and costs continuing well into the future, the "bottom line" of the BCA is expressed as net present value, that is, the difference between the sum of present and future benefits and the sum of present and future costs, all discounted to the present. The practice of discounting has been controversial in some circles, especially in the context of environmental projects and policies (for example, Daly and Cobb 1989), where it is claimed that discounting tends to trivialize the demands of future generations for present conservation (see box 5-1) . That argument has been winning fewer converts in recent years (Heywood 1995), as economists have been reminding us

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