Edited by Scott O. Farrow and Richard Zerbe, Jr.
Chapter 10: Behavioral economics and the conduct of benefit–cost analysis: towards principles and standards
Policy-makers face difficult choices in determining how to best allocate scarce resources across social programs and other desirable goods and services. Benefit–cost analysis provides useful information for these decisions, by indicating the extent to which the values that individuals place on program outcomes are likely to exceed program costs. Determining these values has always been challenging, however. Most social programs lead at least in part to outcomes for which no market value exists, such as improved health and longevity or environmental quality. Instead, these values must be estimated from market behavior for related goods or by asking individuals about their willingness to pay. Recent research in behavioral economics adds to the complexity of this task, documenting ways in which individuals at times appear to act irrationally or contrary to their own interests. This chapter supports the development of principles and standards for conducting benefit–cost analyses of social programs, focusing on the implications of behavioral economics for how outcomes are valued in monetary terms. We review traditional practices, discuss findings from behavioral research, and recommend ways in which these findings might be integrated into benefit–cost analyses.
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