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A Place for Cost-Benefit Analysis

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Presentation on theme: "A Place for Cost-Benefit Analysis"— Presentation transcript:

1 A Place for Cost-Benefit Analysis
David Schmidtz

2 CBA & Internal and External Costs
Cost Benefit Analysis (CBA) determines whether or not the adoption of a policy or the taking of an action or the implementation of a project is such that the benefits of the project outweigh the costs. In general, it presents a map of the costs and benefits of doing something. In order to compute costs and benefits one must identify what the costs and benefits are. Costs can be understood in two senses. Internal costs are costs that the agent or institution who is the principle actor must take into account. External costs are costs that the agent or institution who is the principle actor can in some sense ignore because the costs can be shouldered by others.

3 The Environment and Full Cost Accounting
Suppose that Factory F can produce good G at a cost of 100 per unit, and sell the good to consumers for 120, for a profit of 20. However, the production of good G creates air pollution, which costs the consumers an additional 20 through taxes. Factory F does not factor into the costs of producing G the additional 20 due to pollution. Conventional CBA determines that production of G is profitable for F, since the benefit of 120 outweighs the cost of 100. Full CBA determines that the production of G is not profitable for F, since there is no profit. The cost 120 equals the price at which G should be sold.

4 An Environmental Argument for FCBA
Policing corporate pollution requires mechanisms that allow for one to determine accountability for pollution. Thus, if a corporation pollutes, we would want to find a way to analyze the cost of the pollution they have produced, and hold them accountable for it. FCBA provides a mechanism for determining the full cost of the production of a good that a corporation decides to produce. Thus, FCBA can be used to determine the pollution cost of the good produced, and consequently can be useful in holding a corporation accountable for the pollution they have introduced into the environment through the production of the good.

5 Is CBA Anthropocentric?
Is CBA only in the interest of human persons. If so, it would be anthropocentric? While the criticism appears correct, it misses the mark. CBA is only an accounting mechanism for taking into consideration costs and benefits and weighing them against one another. However, CBA is not limited to taking into consideration only the pain, suffering and pleasure of humans. Were the debate on animal rights to be conclusive in favor of the pain and suffering of non-human animals, there is no reason why the pain and suffering of non-human animals could not be factored into a CBA analysis.

6 Does CBA Presuppose Utilitarian Moral Theory?
CBA weighs benefits against costs in providing guidance in decision making. Utilitarian moral theory maintains that the right action is the one from the set of available actions that maximizes aggregate utility. Although it seems as though CBA can only be defended on Utilitarian grounds, it is in fact false that it can only be defended on Utilitarian grounds. CBA is way of organizing a forum for expressing respect for persons: whether that includes domestic persons or global persons or future generations. CBA as a forum can be defended on either Deontological or Consequentialist grounds.

7 Does CBA Tell Us to Sacrifice the One for the Sake of the Many?
It appears as if CBA tells us that whenever the benefits exceed the costs we are justified in adopting a policy. So it would seem that in the following case we are justified in killing 1 in order to save 5. Hospital: 5 people with life threatening injuries are in a hospital. 1 healthy person comes in for a regular check up. The doctor could kill the 1, and transplant his organs into the 5 people suffering from life threatening injuries. Should he do this, given that the benefits outweigh the costs? It is important to keep in mind that CBA is one critical test in decision making, but that it may in certain contexts not be the only test. Moreover, we want to acknowledge that CBA may be one important tool in certain decision contexts along with other tools, while in other decision contexts it is the primary and most important tool.

8 Must CBA Treat All Values as Mere Commodities?
If CBA treats all values as mere preferences, then it treats all values as commodities that can be traded. CBA does treat all relevant facts as either costs or benefits. Treating something as either a cost or a benefit is to treat the thing as a mere preference. So, CBA treats all values as commodities. The problem is that treating something as a cost or benefit doesn’t mean that it is only (or must be treated as) a cost or a benefit. CBA assumes nothing about the nature of values.

9 Some Things are Priceless. So What?
Some critics of CBA think they make a strong point when they say that a certain object is priceless and thus beyond the scope of CBA. For example, they might say that some rare species of whales are priceless. However, even if something is rare, we must consider the cost of preserving it or saving it. In a world where resources are scarce it is hard to simply say that because a certain good is rare or priceless we cannot compare it to other things we value or desire. Only if we have unlimited funds can we spend them all, if we choose, on preserving a specific good, such as the rare whales. However, once we recognize that we have to spend the money we have on various projects, we realize that we have a competitive resource allocation problem. A competitive resource allocation problem requires us to realize that resources must be distributed, and all projects cannot be funded equally.

10 Does CBA Work? CBA is supposed to identify costs and benefits in a politically neutral way that allows it to be used in public debates as a tool for decision making and public policy adoption. The identification of costs and benefits is often subject to income asymmetries and political power. So, that those with more income and political influence can shield or enhance something as a cost or a benefit, when in actuality it may not be. CBA only works if it is able to be politically neutral. From (2) it is not politically neutral. So. CBA does not work.

11 Must CBA Measure Valuations in Terms of Willingness to Pay?
CBA requires us to measure the value of a good in terms of a person or a group’s willingness to pay for the good. But willingness to pay is a function of a person’s income. People who make more money, are able to pay more for a certain good or policy. Is it just to allow willingness to pay to be a measure of the value of something to a person or a group if people have different income levels. Can we use percent of income as a way of solving the problem?

12 Conclusions What can you do with CBA? You can draw conclusions like this: We conducted CBA, taking the following costs and benefits into account. The proposal before us appears to pass inspection, where the losers would lose more than the the winners would gain, we recommend that the proposal be rejected. We could be wrong for the following reasons

13 How we could be wrong There may be costs or benefits we have not anticipated Furthermore, even known costs and benefits are often impossible to quantify precisely, Therefore our numbers must be viewed with caution.

14 How we could be wrong When CBA is used in support of a given proposal, CBA need not be decisive for there are other grounds upon which policies can be prohibited, favorable CBA notwithstanding. Nevertheless, until someone either identifies additional costs or benefits for us to consider, or else informs us that the proposal violates a treaty (for example) that created rights and obligations that render costs and benefits moot, all we can do is go with our best understanding of the information before us. Without new information, following CBA, seems like the best we can do.

15 CBA with Full Cost Accounting
CBA can be used. But versions of it that don’t take everything relevant into consideration maybe ethically indefensible. CBA with Full Cost Accounting, which takes into consideration both internal and external costs, would appear the ethically best tool to use in decision making. Using FCBA does not mean that FCBA gets the final word. It is possible that other overriding factors can deem the judgment of FCBA irrelevant.

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