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Benefit-Cost Analysis

Useful tool to compare alternatives; incorporate distribution of benefits and cost among subgroups; incorporate economic theory: discount rates, etc; document how estimates were obtained



EPA uses BCA extensively


Kenneth Arrow et al on BCA

1) BCA is useful for comparing the favorable and unfavorable effects of policies; 2) decision-makers should not be precluded from considering the economic costs and benefits of different policies in the developments of regulations; 3) BCA should be required for all major regulatory decisions; 4) although agencies should be required to conduct BCA for major decisions and to explain why they have selected actions for which reliable evidence indicates that expected benefits are significantly less than expected costs, those agencies should not be bound by strict BCA tests; 5) benefits and costs of proposed policies should be quantified wherever possible. Best estimates should be presented along with a description of the uncertainties; 6) the more external review that regulatory analyses receive, the better they are likely to be; 7) a core set of economic assumptions should be used in calculating benefits and costs. Key variables include the social discount rate, the value of reducing risks of premature death and accidents, and the values associated with other improvements in health; 8) Although BCA should focus on overall relation between benefits and costs, a good analysis will also identify important distributional consequences


Myth of the universal market

The first myth is that economists believe that
the market solves all problems.


Myth of market solutions

A second common myth is that economists
always recommend a market solution to a
market problem


Myth of market prices

The next myth is that, when non-market
solutions are considered, economists still use
only market prices to evaluate them.


Myth of efficiency

The last myth we address here is that these
economic analyses are concerned only with
efficiency rather than distribution


Economists in environment

economics don't necessarily believe that markets solve all problems.