Cost–Benefit Analysis and Incentives in Evaluation

Cost–Benefit Analysis and Incentives in Evaluation

The Structural Funds of the European Union

Edited by Massimo Florio

This book provides an authoritative contribution to applied cost–benefit analysis (CBA) and other evaluation methods in the context of the regional policy of the European Union. Through the use of Structural Funds and other financial and regulatory mechanisms, the EU will help to promote thousands of infrastructure projects in the next decade. CBA will be a key ingredient in the investment decision process and the authors provide important insights from their international experiences in project appraisal and evaluation and point to some valuable lessons to be learnt for the future.

Chapter 13: Regional Welfare Weights

Erhun Kula

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

Extract

Erhun Kula INTRODUCTION In a good part of the literature on welfare economics, the Pareto rule has been given a substantial emphasis. This rule states that a society would be made better off if at least some of its members improved their position without making anyone worse off. Some economists realized that as no project is likely to meet this rule, then no project should ever be approved. Addressing this problem, Kaldor and Hicks modified the Pareto rule by suggesting that a project should be allowed if it improved the well-being of some people even though others might lose out, provided that the gainers compensate the losers and still are no worse off. This is the basic principle of the so-called Kaldor–Hicks compensation criterion. The Kaldor–Hicks principle has been criticized on the grounds that, in reality, compensation is not paid and thus the rule simply gives an excuse to governments to go ahead with projects that may create lasting injury to some members of society. Often the losers tend to be the weak and unprotected in society. Deciding on the nature and level of the compensation, if it ever were to be paid, is an even more difficult problem. Who’s going to compensate fully the flood victims who suffered enormous losses in the summer of 2002 in Eastern Europe which may be due to global warming. Many scientists believe that these floods will intensify in years to come These are thorny but relevant questions that...

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