Chapter 7: The Theory of Dynamic Cost–Benefit Analysis: Some Recent Advances
Chuan-Zhong Li 1 INTRODUCTION Cost–benefit analysis is a branch of applied welfare economics which aims to serve as a tool for evaluating the social desirability of public projects. The main body of the theory and method has been developed since the 1950s (see Green Book, 1950; Eckstein, 1958; Maass, 1962; Dasgupta and Pearce, 1972; Little and Mirrlees, 1974; Sugden and Williams, 1978; and Drèze and Stern, 1987, for example). While the interest was mainly on capital investment projects in the earlier years, the focus has gradually shifted to more general projects such as public policy reforms and environmental programs to promote sustainable development. The change in emphasis of project types and the long-run nature of environmental effects have also led to a paradigm shift in the method of framing cost–benefit rules. One characteristic is the use of forward-looking welfare indices which represent some constancy equivalents of future utilities rather than the stream of project consequences (see Aronsson et al., 1997; Dasgupta and Mäler, 2000; Weitzman, 2001; Arrow et al., 2003; Li and Löfgren, 2008). For such a paradigm shift, accounting prices have played an essential role. A different but related area is the measurement of sustainable development, which since the publication of the Brundtland 1987 report has become a popular phrase. As a matter of fact, these two areas belong to the same theory package but have been labeled somewhat differently as welfare comparisons over ‘space’ and ‘time’. For cost–benefit analysis, the problem is...
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