Cost-benefit analysis has been developed over a long period of time and most of its advocates would argue that even if policies are not solely formulated on the basis of CBA, decisions at least should be informed by it. Thus, CBA is a normative policy formulation tool for making recommendations to policymakers about what they should do. However, there is a greater role than currently obtains for positive analysis of when and why CBA is relied upon to formulate some actual policy decisions but not others, as well as understanding at what stage in the policy process this assessment actually takes place.

Some of the evidence to date should provide pause for those who believe that CBA is always used, is always done well and is always influential in policy formulation. Yet the finding that 'real world' decisions routinely downplay CBA also needs to be interpreted with care and could well be a matter of degree across different policy venues. For example, CBA is only one input to the decision in many (or most) cases. There are other complementary decision making procedures, as we have discussed, which vie for consideration and will help shape policy outputs and outcomes.

Nevertheless, there is growing recognition of the political motives that could explain both the use and influence (or otherwise) of CBA on policy decisions (Hahn and Tetlock 2008). Some of these considerations are factors which might have a bearing on how any form of evidence informs decisions: for example using formal evidence simply to justify decisions which, for all intents and purposes, already have been made. Yet, it could be that CBA is relatively more prone to these political machinations. All of this is clearly important to placing policy appraisal, including CBA, within a realistic understanding of how the policy formulation process actually works. Critically, however, it does not change the fundamental role of CBA. This remains the crucial task of explaining how a policy should look if an economic approach is considered to be consequential to that judgement. Indeed, if decision makers are genuinely interested in this policy formulation tool then what is known about actual use and influence of CBA should also be translated into practical implications for enhancing its role.

For example, while official CBA guidelines are no guarantee of actual use, these remain focal publications, setting the bar for how appraisal should be done. It is important that these guidelines reflect, in a practical way, the frontier of knowledge. Translating them into action, however, requires an additional range of considerations. Some of this may involve increasing the economic literacy needed to undertake good quality appraisals (Pearce et al. 2006), particularly in those policy venues with relatively little experience in this respect.

Political considerations may also raise the risk of biased appraisals and put a premium on understanding better the institutional process for undertaking CBA. This involves asking questions not only about how CBA is undertaken but also by whom, how and in what policy venue it is organized (Florio and Sartori 2010; IEG 2011). The starting point for this might be the insight that responsibility for conducting CBA should not be assigned solely to those with a critical stake in a project's implementation (IEG 2011). In the case of EU Regional Policy, this has involved expanding the role for ex post cost-benefit assessment as a way of creating incentives for good studies to be done ex ante by member states applying for regional funds. Other proposals involve a separation of responsibilities for conducting ex ante studies in terms of 'who' is doing the analysis. In this way, those appraising a proposal are placed at arm's length from the project or policy (perhaps based in a central agency) rather than the analysis being done by beneficiaries of the proposed action.

Of course, no policy system is likely to be perfect in all these respects and each will be associated too with different political considerations. For example, there may be little appetite amongst politicians for adding costly ex post studies to look at decisions which are literally history and a potential source of political embarrassment (Hahn and Tetlock 2008; see also Chapter 8, this volume). A central agency for conducting ex ante assessment may need to rely on information from parties that the separation was designed to keep at greater distance from the analysis. Nonetheless, consideration of these and other policy capacity-related challenges (see Chapters 8 and 9, this volume) is crucial if policy formulators are serious about addressing the gap between the imagined and actual use and influence of CBA in the 'real world'.


1. This chapter draws on and updates Pearce et al. (2006) and Atkinson and Mourato (2008).

2. The Kaldor-Hicks 'compensation principle' establishes this more formally, through the idea of hypothetical compensation as a rule for deciding on policies and projects in real-life contexts (Hicks 1939; 1943; Kaldor 1939). What this amounts to is the recognition that projects and policies entail (almost inevitably) losses to some groups and individuals as well as gains to others. This alone is not a reason, according to this tradition, to reject proposed actions. So long as actions create gains which are greater than the losses, there is scope for gainers potentially to compensate losers (and still be better off).

3. There are many comprehensive reviews of economic valuation methods more generally (for example, Bateman et al. 2002; Champ et al. 2003; Freeman 2003; Pearce et al. 2006; Hanley and Barbier 2009).

4. The CBA approach to decision making is based on 'individual values' in the sense of adding up how individuals value a proposed policy change. For some this is in conflict with notions of 'shared values' (see, for example, Fish et al. 2011). This has roots in earlier discussions about how people value changes, in the context of environmental policy, as consumers or citizens (Sagoff 1988). The current emphasis on shared values considers the way in which the environment has collective meaning and significance for communities of people and how the appraisal process might ignore this insight. How these shared values might be more formally incorporated in policy appraisal remains work-in-progress.

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