A Cost–Benefit Approach
Chapter 38: What is So “Social” About CBA? Fundamentals of CBA
What makes CBA “social” is that it tries to specify when any intervention makes society better off. There are two main objectives that are to be used to make the determination as to whether something is a social improvement. The first is economic efficiency and the current chapter is devoted to this objective. The second is equity, and the next two chapters will examine this objective. In the process of outlining the principles behind economic efficiency, we will explain what the crucial value judgments are that need to be made to justify the methodology of CBA, that is, we will be identifying the fundamentals of CBA. ECONOMIC EFFICIENCY AND WILLINGNESS TO PAY Mainstream economics assumes that society is individualistic. For an intervention to make society better off, one first has to make individuals better off. How does one know whether individuals are better off? One looks at their net benefits. If the willingness to pay for all the outputs that individuals receive exceeds their willingness to accept compensation for all the inputs they supply, then net benefits are positive and they are better off. To find out whether society is better off one just sums the net benefits (both positive and negative) for all the individuals to obtain aggregate net benefits. If this is positive then the intervention is worthwhile. After all interventions that have positive net benefits are undertaken, then net benefits are highest and “economic efficiency” has been realized. In other words, the idea of economic efficiency is...
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