A Choice Modelling Approach
2. Distributional weighting and cost– benefit analysis 2.0 Introduction The conceptual foundations of the application of distributional weights in a CBA setting are well established in welfare economics theory. An understanding of the derivation of distributional weights is essential before one can proceed to their application in CBA and the incorporation of distributional preferences in policy analysis. 2.1 The social welfare underpinnings of cost– benefit analysis In decision-making between policy options, welfare economics provides a framework for understanding a social ordering over alternative possible states of the world (Boadway and Bruce 1984). It is based on three value judgements (Maler 1985): • Each individual is the best judge of his/her own welfare.1 • The welfare of society depends on the individual welfare of its citizens.2 • If the welfare of one individual increases and the welfare of no-one decreases, the welfare of society increases. This is known as a Pareto improvement. The problem in terms of policy analysis is one of ranking different resource allocations to maximize social welfare. Well-established theory indicates that in a two-person economy, a competitive market will exhaust all of the gains from trade and an equilibrium allocation will be achieved that is Pareto optimal; that is, an equilibrium where no one person can be made better off without someone else being made worse off. However, this market outcome, known as the First Welfare Theorem, does not address the question (amongst others) of the distribution of utility between individuals and groups within society. Although it provides insight into the...
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