Cost-benefit analysis: a tool that is both useful and influential?
The recommendation that policymakers should go ahead with public policies and projects only if the benefits of these proposals outweigh the costs has a commonsensical appeal. Articulating this intuition more rigorously in policy formulation is the domain of cost-benefit analysis (CBA), or variants which draw on the same conceptual framework. There is an extensive academic literature on CBA, some of which may not use the term 'cost-benefit analysis' but instead refers to 'benefit-cost analysis', 'policy evaluation' or 'project appraisal'. Numerous texts and manuals have appeared covering CBA generally (for example, Boardman et al. 2011), in developing countries (for example, Londero 2003) and applications such as environment (Hanley and Barbier 2009; Pearce et al. 2006). A number of characteristics make CBA distinctive as a policy formulation tool. Perhaps most notably, it is an attempt to quantify costs and benefits in monetary terms. This, in turn, relies on an assessment of how people whose wellbeing is affected by policy actions value those losses and gains.
But while economic texts give every impression that CBA has all the answers, in practice there is some recognition that CBA is only one input to policy formulation decisions. The very act of carrying out a CBA presupposes, for example, that physical impacts have been understood sufficiently to bring them into the ambit of an economic appraisal. In addition, CBA sits side-by-side with a number of assessment tools and metrics all purporting, in different ways, to indicate the worth of a policy action. Moreover, none of these mechanical tools (including CBA) is a substitute for human judgement. The decision process here might be conceived of as policymakers having all this multidimensional information at their disposal and using it to inform a rational (or at least a sensible) choice that represents an overall improvement for society.
That, at least, might be the notion in principle. So while this chapter begins by setting out what makes CBA distinctive and how it is intended to be used, in what follows, the main purpose is to consider how CBA operates in the 'real world': the actual world of policy formulation beyond the textbook. This discussion reviews evidence regarding two related but distinct concerns: whether CBA is actually used in policy formulation and whether it is influential in this process (perhaps in the sense of what policy outputs and outcomes are actually adopted). Published evidence is somewhat sparse, especially in the latter dimension. However, what seems clear is that policymakers cannot simply be assumed always to be choosing actions so as to achieve societal improvements as CBA practitioners might like to assume. In these respects, CBA might be downgraded or given less prominence than other (non-CBA) evidence used in informing decisions. Understanding what these decision makers actually do is critical too from the perspective of making sense both of how the policy formulation process actually works and how guidance, which might enhance this process, can be more influential in future.