Why Cost-Benefit Analysis is an Inefficient Decision-Making Process in Public Policy
By Delaney Edge
What is Cost-Benefit Analysis?
Cost-Benefit Analysis (CBA) is a process used by governments to make and evaluate public policy through the quantification of consequences. The current scholarship recognizes it as a system used to crudely implement utilitarianism, which claims that actions are only right if they promote happiness or pleasure. These are used to measure the overall welfare of society–the aggregate sum of the welfare of individuals is measured as the overall welfare of the population. Although CBA has important implications on public policy and gives a solid foundation for evaluating possible policy decisions, its hyper-fixation on monetary costs can be problematic for legislating large, diverse, and complex societies. The frequent lack of attention to important factors, such as how welfare is measured and the normative impacts on society, makes it insufficient to be the sole method used to evaluate policies.
CBA is a rough process of converting the consequences of a policy into monetary terms to determine that policy’s impact on the overall welfare of the population. It stems from a mix of utilitarianism and consequentialism, which claims that the rightness of an action is evaluated solely by its consequences. CBA is done using ten steps, which are as follows:
- Explain the purpose of CBA
- Specify the set of alternative policies
- Specify standing (decide whose costs and benefits count)
- Identify the impact categories, catalogue them, and select metrics that will be used
- Predict the impacts of the policies quanitively over the life of the project
- Revise all impacts in monetary terms (attach dollar values to the consequences)
- Discount benefits and costs to obtain present values
- Calculate the net present value of each alternative
- Perform a sensitive analysis of the options
- Make a policy recommendation
These steps are designed to provide a systematic process that allows policymakers to see if a policy maximizes financial resources and promotes the overall welfare of society. Although not explicitly stated in CBA, an important factor in deciding whether the aggregate sum of welfare is proportional to the costs of a policy is the “value of a statistical life” or VSL. The current VSL ranges between nine and ten million and refers to the amount of money people are willing to pay to save a life or reduce the risk of death. VSL is important to CBA because it is used to evaluate whether the costs of a policy surpass a society’s VSL, or a person’s willingness to pay to implement that policy.
In 1993, President Bill Clinton signed Executive Order 12866, which standardized the way CBA would be used as a regulatory process in policy decision-making. In 2003, the U.S. Office of Management and Budget provided decision-makers with further guidance, including suggestions to account for the willingness of citizens to pay for a benefit and the willingness of people to accept the consequences of not having that benefit. These guidelines apply to a wide variety of public policy areas. Some examples include regulations for federal agencies, health care resource allocation, and many more. As outlined in step three, the policy areas require decision-makers to decide who has“standing”. People who are determined to have standing in policy considerations refers to the groups for which the costs and benefits of a policy are being measured to find what the promotion of overall welfare in society will be. This can include the whole population but, more often than not, standing is given to specific groups that are considered to be most impacted by a policy. Determining the standing of groups in policy considerations can be problematic. There is no standard practice for determining which groups have standing. As a result, decision-making bodies across different federal agencies, or based on what people make up that legislative body at any given time, can construct completely different considerations for who has standing for the same policy. As a result, determining standing on subjective and arbitrary means is harmful to public policy decision-making because the considerations given to groups, especially vulnerable or minority groups, is not guaranteed.
Governments use CBA for a couple of reasons. The first is that it allows citizens to hold policymakers accountable by allowing people to ask questions about a policy and forcing the officials making the decisions to explain their reasoning for choosing one policy over another. This way, governments cannot lie about a policy or deem one life more valuable than another without being scrutinized by the public. The second reason governments use CBA to make public policy decisions is because it maximizes financial resources in order to yield the greatest net benefit of welfare. Similarly, it allows governments to focus only on the promotion of welfare a policy is expected to promote and not the distribution of costs and benefits. This decreases the intellectual burden on policymakers because it narrows the considerations they have to account for to evaluate policies. But this highlight a possible issue with the way standing is considered and used in CBA. Policy-makers could be tempted to disproportionately give standing to the groups that a policy will benefit the most, making the overall welfare the policy would promote in society skewed upward and toward specific populations. And because policy-making bodies or constantly changing and are not always the most ideologically diverse groups, this could cause issues with welfare distribution and overlooking vulnerable populations that were not given standing.
The Pros and Cons of CBA
CBA should not be used as the sole means of evaluating public policy, although it has a limited and important role in the process.
- CBA makes it impossible to quantify all consequences of a policy, such as emotional or environmental impact, in monetary terms. Its normative impact on society, meaning how a policy impacts the social norms or behavior of a society, is of particular concern. This needs to be taken under special consideration in modern times since there are an unprecedented number of policies and regulations being passed that deal with social issues and changing the status quo, such as race relations.
- Strict CBA does not distinguish between people of different economic classes, which can cause issues when deciding VSL. For example, someone with an annual income of one million dollars would likely be willing to pay more to reduce all kinds of risks compared to someone who makes only thirty-thousand dollars a year. People’s risk perception is directly impacted by their life experiences, which vary greatly between socioeconomic classes.
- The total absence of CBA would also have its problems. One issue that might arise is policies being passed that would promote great welfare regardless of the monetary costs or vice versa, putting great strain on both the government and its citizens. Therefore, CBA should be used as a preliminary evaluation to root out policies with economically or materially absurd implications.
- CBA could be useful in a situation where two policies have similar consequences and decision-makers are evenly divided on which policy to implement. In such cases, it would be natural to choose whichever policy could yield the same results more economically. Therefore, CBA should be used as a preliminary evaluation and possibly as the deciding factor in cases of comparable consequences, but never as the only method of analysis for public policy.
What the Role of CBA Ought to Be
If CBA is only to be used for preemptive policy evaluations or a final decision of comparable policies, a new system of evaluation must be created. This new system would need to take into account the things that CBA ignores, such as the process of determining who has standing, how policymakers determine the overall welfare, and the distribution of costs and benefits. While I am not in favor of the redistribution of goods or a strong government welfare state, I believe it is important to consider these factors when deciding on public policy since many of the vulnerable populations in society have little or no say in public policy decisions.
As society expands to have larger, more diverse, and complex populations, it is important to take into account the everchanging social, economic, and political conditions that emerge from that society. It is essential to give vulnerable populations extra attention in this system as they can be easily lost among the voices of the majority. The well-being of citizens is important independently of financial situations because it contributes to a society’s aggregate sum of happiness, which then translates into general welfare. These factors include security of property, access to opportunity, availability of basic living necessities, and more. Normative societal impact is also important to consider because certain policies might actively work to change the demographic makeup of areas, lessen economic inequalities people may see as unjust, or generally change the culture of society. Attempts to do this can have many negative consequences that come from conflict or partisanship, so they cannot be ignored.
Take the regulation passed by the National Highway Traffic Safety Administration (NHTSA) in 2018 as an example. It requires all passenger vehicles weighing less than 10,000 pounds to have a rear-view camera system. The purpose of the mandate was to protect vulnerable populations, such as children, the disabled, and the elderly from being victims of “back-over” crashes. These benefits were summed to equal between $344-396 million and the costs were estimated to be between $546-620 million. If the NHTSA had only used CBA to evaluate the regulation, it would not have been passed since its costs outweighed the benefits. But in this instance, the NHTSA was justified in passing this regulation. It gave special consideration to the wellbeing of vulnerable populations and accepts that the benefits to society outweigh the costs to car manufacturers. This regulation also has a minimal normative impact on society beyond increasing dependence on technology and establishing a new norm in car manufacturing.
Responding To Objections
Some would object to this argument and say that CBA should have a larger role in deciding public policy because it already takes uses measures of pleasure to measure the promotion of general welfare in a society, so individual welfare does not need to be given any special consideration. In response, I would say that the aggregate sum of welfare among individuals in a society does not translate into the general welfare of citizens. The use of an aggregate sum focuses purely on satisfying the preferences of the majority, allowing the individual welfare of disadvantaged citizens can be overlooked. And, again, the overall welfare is based on who was given standing in that policy consideration which I have also described the issues with. Giving more attention to the welfare of citizens based on groups rather than a simple majority allows for more inquiry into the distribution of costs and benefits. Considering individual welfare also allows for policymakers to measure wellbeing beyond income or financial situations.
Another critique of my theory may be that CBA forces policymakers to be held accountable for their decisions, so my proposal allows for less government transparency. But this is not true since CBA is still used at the beginning of each policy evaluation and sometimes at the end. Therefore, it would still give citizens the means to hold decision-makers responsible in the same way a stronger use of CBA would let them do. Furthermore, it would allow for future revision of a CBA because it would give people time to investigate who was given standing in the policymaking process and what populations the decision-makers overlooked. In this case, the CBA could be redone and a more fair analysis could be carried out.
Some might also say that the use of CBA and VSL at all is problematic because it sometimes requires a price tag to be put on human life, which is highly controversial. Yet, this is exactly why CBA is necessary because it allows governments to put a monetary value on life without having to directly consult their subjects, which would lead to no policy being passed since most people would refuse to give a dollar amount for how much they believe life is worth. Still, others would say that it would be easier to change the structure of CBA itself to include welfare or other non-monetary considerations. This, however, would not work because doing that would completely undermine the goal of CBA, which is to render all consequences in quantifiable terms.
Ultimately, CBA should have a limited role in evaluating public policy because its lack of attention to the welfare of individuals and normative impacts on society make it unfit to be used as the only means of analysis. The strong use of CBA in public policy decisions raises questions about how ethical it is to quantify qualitative consequences and how representative the aggregate sum of welfare is for all citizens in an ever-growing, diverse, and complex society. CBA in public policy decision-making should be limited to use as a preliminary screening, and possibly as a deciding factor, of policy options. A new evaluation system that re-evaluates how the government measures overall welfare and considers the normative impacts on society would be more efficient while also acknowledging the unique characteristics of vulnerable populations and the importance of the distribution of costs and benefits. Therefore, CBA is important for eliminating absurd or uneconomical policies from consideration, though it does not consider all of the important factors that should be measured when making public policy.
Delaney Edge is a senior at the University of North Carolina at Chapel Hill pursuing a Bachelor’s Degree in U.S. History with a minor in Conflict Management. She intends to pursue a legal degree after graduation with a concentration in constitutional law.
The views expressed in this article do not necessarily represent those of the Berkeley Public Policy Journal, the Goldman School of Public Policy, or UC Berkeley.
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