WHAT IS COST BENEFIT ANALYSIS?
The conceptual case for thinking about costs and benefits in formulating policy is typically cast in the relatively narrow terms of welfare economics. In practical terms, this places an emphasis on the efficiency with which, for example, public funds are spent. This conceptual foundation offers considerable strength, built as it is on an intellectual tradition which dates back many decades (see, for the history of CBA, Pearce 1998 and Persky 2001). It confers a weakness too: well-known problems identified, in theory, with these welfare economic foundations also become a problem for the practical application of CBA (see Gowdy (2004) as an exemplary critique in this vein).
A broader rationale for CBA, however, is put forward by Randall (2002). There are many reasons, he argues, why a policy action can be viewed as a good thing (or otherwise). But broadly speaking, two such reasons relate to the 'rightness' of the action and its consequences. In this respect, CBA 'exists' to say something more tangible about the former. That is, the likely benefits and costs of actions can be viewed as one important input needed to make sensible decisions about whether policy proposals are good or otherwise. Put this way, CBA is not just the transfer of cold market logic to all policy venues, which can then simply be rejected if one chooses to reject the underlying premise for this transfer. Instead, costs and benefits are something that 'benign and conscientious' policymakers should be interested in more generally if they are concerned with creating good consequences as a result of their decisions (Randall 2007, p. 92).
From this starting point, CBA can be interpreted as constructing an elaborate policy formulation tool that enables the quantification of these costs and benefits to the fullest extent possible. Stokey and Zeckhauser (1978, p. 134) define it as: the principal analytical framework used to evaluate public expenditure decisions. The approach requires systematic counting of all costs and benefits, tangible and intangible, whether readily quantifiable or difficult to measure, that will accrue to all members of society if a particular project is adopted.
According to this quotation, the scope of CBA is truly vast, the ambition level is high and the ensuing economic evaluation apparently trumps all else in informing any decision. For example, it is not circumscribed by looking at the worth of an action from the standpoint of any particular stakeholder or interest group. Instead CBA works on the basis that any gain or loss to anyone who has standing (in other words, who counts) must be included. Nor is the approach, in principle, restricted to any particular policy venue. We discuss what this might mean in practice in the section below.