Cost benefit analysis (CBA) has been both vilified and supported in legal literature but misunderstood both in that literature and in the economic literature. The vilification is often wrong or muddled in both literatures. The fact is that a proper statement of CBA, which I call benefit-cost analysis, BCA, suggests it is quite compatible with moral decision making, provides a useful decision framework.
This article distinguishes between BCA and CBA. CBA is the traditional approach of valuation, built on the potential compensation test (“PCT”) of hypothetical compensation and the avoidance of distributional and other equity considerations. BCA is not built on such a hypothetical formulation. BCA recognizes rights and moral sentiments as values insofar as they are reflected in the willingness to pay (“WTP”) to obtain them and the willingness to accept (“WTA”) payment in return for giving them up. CBA is often limited to analyzing only the monetary, fair market value of property. BCA provides a more accurate measure of well-being, drops the CBA grounding in the PCT, and reflects moral sentiments in valuation, making it superior to CBA for many purposes and not inferior in any. The major moral criticism of the traditional CBA and the formulation here of BCA is that values are then determined by the willingness to pay for them or the willingness to accept payment to give them up, that is by wealth and income. But, wealth and income are values preserved by the legal system. Any system of valuation in a regime of law must begin with what is legal and end with what is legally possible. It is no legitimate criticism of BCA that it rests on law.
Richard O. Zerbe (University of Washington)