Cost–Benefit Analysis and Distributional Preferences

Cost–Benefit Analysis and Distributional Preferences

A Choice Modelling Approach

Helen Scarborough and Jeff Bennett

Advancing the incorporation of equity preferences in policy analysis, this book demonstrates the application of choice modelling to the estimation of distributional weights suitable for inclusion in a cost–benefit analytical framework. A platform for discussion of the challenges and opportunities of this approach is presented in the form of a detailed case study designed to estimate community preferences for different intergenerational distributions. While the case study is focused on natural resource management and environmental policy, the conceptual and methodological advances illustrated by the authors are relevant and applicable to a wider array of policy deliberations.

Chapter 2: Distributional Weighting and Cost–Benefit Analysis

Helen Scarborough and Jeff Bennett

Subjects: economics and finance, environmental economics, public finance, public sector economics, valuation, environment, environmental economics, valuation


13 • Satisfy welfarism, which means that social welfare depends only on the utility of individuals. • Be increasing with each individual’s utility level and therefore satisfy the Pareto criterion. • Display an intensity of trade-off between individuals’ utilities that depends on the degree of inequality in society. • Be indifferent about who enjoys a high or low level of utility. This principle is known as anonymity. Rawls (1971) developed an argument as to why society can agree in principle on a priori rules through the use of a hypothetical ‘veil of ignorance’. It infers that individuals, from behind a veil of ignorance that screens knowledge of their future positions, unanimously agree on a redistribution formula (Johansson 1993).5 The most common form of the SWF is the utilitarian, where the utilities of individuals, i… n, are summed and the aim is to maximize the sum of the utilities, that is: W(U1 … Un) = ΣU n i =1 1 (2.3) This is known as the classical utilitarian or Benthamite welfare function, developed by Bentham (1789) and championed by economists such as Mill (1863), Edgeworth (1881), Marshall (1890) and Pigou (1920). Utilitarianism has been, in many ways, the ‘official’ theory of traditional welfare economics (Sen 2000). There are, however, two particular limitations of utilitarianism as a theory of social welfare which are relevant. First, the process of aggregation can lead to an inability to distinguish between any two distributions that yield the same total utility. Hence, it can answer the efficiency question but not the...

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