Chapter 14 The theory of cost-benefit analysis

TLDR: Cost-benefit analysis as discussed by the authors provides a consistent procedure for evaluating decisions in terms of their consequences, and is widely used in decision-making, such as tax, trade, or income policies.

Abstract: Publisher Summary The theory of cost-benefit analysis is widely used. It contributes to the understanding by giving a formal description of the subject and examining the theoretical basis for some of the techniques that have become the accepted tools of decision-making around the world. The aim of cost-benefit analysis is to provide a consistent procedure for evaluating decisions in terms of their consequences. This might appear as an obvious and sensible way to proceed, but it is by no means the only one. Cost-benefit analysis clearly embraces an enormous field. It offers clear guidelines for the evaluation of government decisions in such varied fields as tax, trade, or incomes policies; the provision of public goods; the distribution of rationed commodities; or the licensing of private investment. The chapter discusses the way cost-benefit analysis should proceed, a fairly unified account of the most salient results of the theoretical literature, and the way the framework encompasses a number of approaches to the definition and formulation of cost-benefit problems and describes the implications for a number of practical issues.