The problems with social cost-benefit analysis : economics, ethics and politics
Creators: name: Riek, Christine Leviczky
Publisher: name: University of British Columbia
Year: 2010

description: This thesis examines the problems with social cost-benefit analysis in three areas -- economics, ethics and politics -- and suggests how these problems might be addressed in government project review processes. Problems in economics are empirical, methodological or theoretical dilemmas that make a social cost-benefit analysis difficult to prepare and interpret. Problems in ethics stem from the value judgments implicit in a social cost-benefit analysis that may be in conflict with the ethical beliefs of some individuals in society. Problems in politics stem from the various powers of individuals in a political process and challenge the relevancy of analysis. A literature survey, primarily of welfare economics but also of environmental ethics and political theory, is used to determine the various problems with social cost-benefit analysis, while a case study is used to illustrate how these problems are reflected in practice. Similarly, ideas for improvement are drawn from the literature of environmental impact assessment and these ideas are illustrated by applying them to the case study. The problems are discussed according to the stage of analysis at which they occur: problem definition, specification of objectives, selection of alternatives, prediction of consequences, and evaluation of alternatives. The case study is of the social cost-benefit analysis of B.C. Hydro's proposed Site C hydroelectric development and the associated project review process of the B.C. Utilities Commission Act. Empirical problems in economics range from: defining "wicked problems"; measuring interpersonal utility; defining and measuring consequences; obtaining adequate data; and evaluating or recognizing intangibles. Methodological problems in economics include: predicting consequences; elements of bias in evaluation techniques; the neglect of non-users in evaluation techniques for non-market resources; option values for environmental resources; and evaluating irreversible project consequences. Theoretical problems in economics stem from: narrow problem definitions and incomplete specification of alternatives which hinder achievement of optimal decisions; the theory of "second best"; the Scitovsky reversal paradox; the need for actual compensation to take place under certain situations; the use of willingness-to-pay or willingness-to-be-compensated measures of consumer surplus; the selection of a discount rate; and the effect of risk and uncertainty on evaluation. Ethical problems in social cost-benefit analysis arise from: the existence of multiple and conflicting problem definitions and sets of alternatives; Arrow's Impossibility Theorem which precludes the specification of a social welfare function; value judgments made implicitly in the methods of inquiry in both economics and the science needed for impact prediction; the existence of non-utilitarian frameworks that conflict with the utilitarian emphasis of social cost-benefit analysis; the reductionist nature of valuing environmental resources; the judgments made about individual rights in the selection of willingness-to-pay and willingness-to-be-compensated measures; and the judgments made about future generations in the selection of a discount rate. Political problems in social cost-benefit analysis are evident in: the hidden agendas and political goals of politicians, bureaucrats and interest groups; incentives to bias problem definition and alternative selection in order to justify a politically but not necessarily economically justified project; incentives to restrict the boundaries of analysis to provincial boundaries; and incentives to overstate benefits, understate costs and neglect qualitative project effects. Some of the economic, ethical and political problems can be resolved by changing the way that government project review processes operate. Three broad changes are recommended: a two-tier review process which clearly separates evaluation from the preceding stages of analysis; an increased use of public and interdepartmental review in the early stages of analysis; and a flexible and experimental approach to evaluation.