A Place for CostBenefit Analysis

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A Place for Cost-Benefit Analysis

• David Schmidtz

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Problems with Cost Benefit Analysis (CBA)

• Basically, CBA is weighing pros and cons.
  Sometimes explicit numbers are attached to the
  weights we assign our values. Sometimes this can
  fail to achieve good results. For example,
  Ontario Hydro a utility company tried to do cost
  benefit analysis by only taking into account
  those costs borne directly by the company as they
  claimed other costs were too hard to take into
  account, besides they claimed that was normal
  business practice. However, although this is
  unethical (to refuse to account for the costs you
  make others bear), it is not a problem with CBA
  itself.

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• The problem with Ontario Hydro wasnt that it
  tried to account for costs and benefits but that
  it didnt account for all of them (external costs
  werent accounted for). Part for the problem is
  that everyone does this, people want to conform
  even when practices everyone does are
  unconscionable.

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• There is no general justification for foisting
  external costs on innocent bystanders. (480).

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• Schmidtz is only considering CBA with full cost
  accounting with the welfare of a whole society
  and the whole economy considered. This entails a
  commitment to take care of the consequences of
  ones actions. Today Ontario Hydro has switched
  to this method of accounting. Schmidtz thinks
  that people should use CBA when 1. One group gets
  the benefits for an action and another pays the
  costs 2. When decision makers dont have
  incentive to take costs fully into account (e.g.
  when benefits are localized and costs dispersed).
  CBA should be open to public scrutiny and should
  take into account human and environmental costs.
  

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• The National Policy Act of 1969 required
  environment related government projects to do
  CBA, which seemed to benefit the environment, but
  in the 1970s the Council on Wage and Price
  Stability and Office of Management and Budget
  used CBA to respond to EPA regulations by
  illustrating those costs. Then in 1981 Regan
  required new regulations to be justified by CBA
  so CBA took on an anti-environmental force. Here
  are the concerns of environmentalists about CBA

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Possible objections and responses

• Concern CBA is anthropocentric because it only
  takes into considerations the interests of
  humans.
• Response This doesnt have to be the case, if
  people think the full costs include costs to
  other species these can be taken into account as
  well CBA isnt a substitute of philosophical
  debate.

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• Concern CBA presupposes utilitarian theory x
  is right if and only if it maximizes utility
  the most benefits over costs.
• Response This isnt true. It is a way of
  organizing a forum for respecting the rights of
  peoples even those who arent directly present
  (those far away or yet to be born) and of other
  things people care about. There may be cases
  where costs and benefits shouldnt be taken into
  account.

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• Concern CBA tells us to sacrifice the one for
  the many
• Response When a policy fails CBA then it should
  not be carried out, but if it passes more needs
  to be done, CBA is only one crucial test not the
  sole arbiter of what is right. One still must
  argue the gain is so great for some people that
  it justifies imposing a loss on other people.
  (481).

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• Consider the organ donor case, this does not mean
  utilitarianism is false, rather some institutions
  get their utility precisely by prohibiting
  utilitarian calculations in decision making. Or
  consider Peeveyhour vs. Garland Coal, The coal
  company had promised to restore land that was
  only worth 300 but cost 29,000 to restore. The
  courts decision not to force restoration is
  considered a mistake because they didnt realize
  the limits of CBA, people have rights that cant
  be accounted for by s, CBA shouldnt have the
  role of justifying taking from others because
  this doesnt respect people, it should only be
  one constraint on takings, not a justification
  for them.

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• Concern CBA treats all values as commodities
• Response CBA is compatible with the idea that
  things like worker safety and environmental
  quality ought to be valued for their own sake.
  But in real life situations we often have to
  weigh different values (e.g. recycling and risk
  to workers). And CBA is important when we have a
  single value at stake, its important to achieve
  our end of environmental protection. We can
  recycle and save trees but only by using
  electricity, water and gas that create pollution.
  In such situations it is besides the point to
  talk about valuing the environment for its own
  sake.

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• Schmidtz charges that Critics of CBA sometimes
  seem to say, when values at stake are really
  important, that is when we should not think hard
  about the costs and benefits of resolving the
  conflict in one way rather than another. He
  says, They seem to have things backwards.
  (483).

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• In response to Sagoffs claim that It is
  characteristic of cost benefit analysis that it
  treats all value judgments other than those made
  on its behalf as noting but statements of
  preference, attitude or emotion. Schmidtz
  replies that 1. That Sagoffs critique of radical
  subjectivists in the claim other than those on
  its behalf is justified

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• 2. That Sagoffs claim that all values are not
  reducible to costs and benefits is also justified
  but that we should go as far as possible in
  treating values as weighted preferences. But
  we cannot treat all values as mere preferences s
  if attaching value to honesty were on a par with
  attaching value to chocolate (484) in
  philosophical discourse. 3. Sagoffs claim that
  CBA typically treats all values as preferences is
  right but it doesnt necessarily have to do so.
  We have to decide which values are outside of the
  scope of CBA.

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• CBA doesnt assume that trading off values is
  unproblematic, only that we sometimes have no
  choice. Could Sagoffs claim be that this
  pragmatism is prone to misuse? Sometimes we do
  have a choice and would a plausible response to
  that be that we must institute a framework for
  deciding when the decision to do CBA is necessary
  or legitimate?

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• Concern CBA cant handle qualitative values.
  Sometimes it is not desirable to represent values
  as .
• Response CBA doesnt require this, doing CBA may
  be a means to protecting the things we value.
  Sometimes however there wont be an unambiguous
  bottom line. Just because an object has
  intrinsic value doesnt mean it is priceless.
  The value of a painting may be intrinsic but I
  might still sell it for instrumental value.
  Sometimes we put dollar values on things whose
  value is different from that of .

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• Incommensurability of values isnt necessarily a
  problem. Yet there may not be any point in
  trying to make qualitative values look
  quantitative, the numbers may not mean anything.
  When competing values cannot be reduced to a
  common measure without distortion, that makes it
  harder to know the bottom line. It may even mean
  there is no unitary bottom line to be known.
  Sometimes the bottom line is simply that one
  precious and irreplaceable thing is gained while
  another precious and irreplaceable thing is
  lost. (485). Besides CBA sensitivity and skill
  is required in making decisions.

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• Concern Some things are priceless and cant be
  captured by CBA
• Response So what? If we think turtles are
  priceless we still need to do CBA on different
  ways of saving them. 1. How effective will the
  approach be given the available resources 2. Does
  the cost of saving the turtles mean sacrificing
  something else priceless?

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• Consider the 9 million dollars to save baby
  Jessica vs. saving children in Africa. Or the 2
  billion dollar price tag on burying power-lines
  to save two cases of leukemia from occurring. Of
  course besides the lives other values are at
  stake. When we try rationally to weigh options
  we are putting prices on the priceless.
  Incommensurate values may not be incommensurable
  consider Sophies choice. Perhaps this kind of
  heartbreak is what critics of CBA want to avoid
  in doing it, but what is the alternative? The
  world sometimes requires tradeoffs.

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• Concern CBA doesnt work
• Response When this happens it soften because
  people (like legislators) arent accountable for
  their actions, full cost accounting is necessary.
  It is also important to remember that the
  outputs of CBA are only as good as the inputs.
  The real action takes place before the numbers
  get added. The Peeveyhouse case for example was
  the result of bribery, and CBA sometimes
  shouldnt be used to determine action. One way
  of preventing this is by making it a public
  process. Sometimes we have to realize that
  people can deal more effectively in small groups
  and the whole community does not need to get
  involved.

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• Concern CBA measures valuations in terms of
  willingness to pay, which doesnt capture our
  values
• Response This is a problem partly because it
  reflects peoples actual resources (what seems
  like a lot to some is a little to others).
  Another part of the problem is that people dont
  take willingness to pay seriously and hypothetic
  willingness is too subjective to justify putting
  waste treatment plants (for example) into poor
  neighborhood based on willingness to pay. This
  seems right, but what is the alternative?

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• Is the lottery system better (when the rich will
  simply move elsewhere these are not random
  results), or should the rich get to pay the poor
  to accept the costs? A concern is that the sites
  are then put in places where they are far from
  the people who work in them which contributes to
  pollution. The response to the worry is that the
  assumption of critics is that the decisions will
  not be respectful and done on the basis of
  campaign decisions and the like, but this is not
  the problem of CBA. Perhaps Schmidtz thinks,
  public scrutiny will prevent politicians from
  asking the wrong questions, and to negotiate with
  actual communities.

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• Concern CBA discounts future generations. In
  economic theory future money is discounted, it is
  assumed to be worth less, this means that there
  is nothing irrational about borrowing against the
  future. But some think this isnt fair to those
  who come later.

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• Response What needs to be done is to make sure
  people pay back loans. Discounting is O.K. when
  the costs of getting capital are internalized,
  but redistributive discounting is objectionable.
  We can also decide not to introduce discount
  rates in CBA, we are the ones who decide whether
  to discount lives in the same way as the cost of
  saving a life, and this seems clearly wrong.
  Its a fact that affluent people can look to the
  future more so we have to 1. Teach people to see
  their future as depending on their use of
  resources (conservation vs. degradation) and 2.
  Help them become affluent enough so that they can
  look to the future.

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Summary

• If CBA is used correctly it will take into
  account as many costs as it can, of course it may
  miss costs or it may not be able to quantify
  them, in addition it may be inappropriate in some
  circumstances. We need skills and common sense
  in implementing CBA and we need to realize that
  it never tells us to do something and is only as
  good as its inputs. It is a way of organizing
  information and a forum for getting information
  it should be open to public scrutiny.

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Quiz

• What is MMSD? At what levels (e.g. community,
  national, international etc.) does the final
  report focus?
• When does Schmidtz think CBA is a good idea?
• What are asarcows? What was the mining companys
  award for? How much water do they re-cycle?
• What kind of value does Brennan think CBA can
  never capture and why?