Robert J. Brent, Advanced Introduction to Cost-Benefit Analysis

Robert J. Brent, Advanced Introduction to Cost-Benefit Analysis, Edward Elgar, 2017, xiv + 139 pp, 1 78536 176 0, pbk, £17.95

This book does precisely what an ‘introduction’ to cost-benefit analysis (CBA) ought to do. It doesn’t make complicated what needs to be simple: ‘… if the calculated benefits are greater than the costs, do it; if the calculated costs are greater than the benefits, don’t do it’ (p. 2); and it offers comparisons with alternative approaches ( – markets, democracy, employing ‘basic needs’ criteria, are all shown to allocate resources less efficiently than CBA). Throughout, the book employs case studies to illustrate important points. The evaluation of a bus service has to take into account the congestion, fuel cost, and other savings to car drivers and pedestrians, so net benefits might be positive even if net direct revenue benefits are negative: and where this is the case, public subsidy is clearly warranted. Similarly, an evaluation of policies designed to tackle dementia illustrates a ‘willingness to pay’ methodology to discover the value of a service, which can then be compared with the cost. This case study interestingly reveals that net benefits can be positive at the same time median benefit is negative, suggesting that democratic processes are not necessarily the best method for deciding on public policy. (I leave the reader to suggest an obvious recent example.)

In conformity with its ‘introductory’ intention, the book mainly eschews technical detail, although it quite properly includes it where necessary: for instance, in discussions of the ‘willingness to pay’ survey methodology for evaluating the value of a public service, of different questionnaire questions, of the differences between ‘willingness to pay’ and ‘willingness to accept [money in place of a service]’ methodologies, and of the associated ‘quality adjusted life year’, ‘human capital’, and ‘value of a statistical life’ quantities. Also discussed in some detail are discounting, the ‘social discount rate’ (an important parameter in The Stern Review of the Economics of Climate Change, which is discussed), and the ‘internal rate of return’: the rate that discounts the future (additional) lifetime earnings stream such that it equals the value of the private net costs. In this context a particularly interesting case study is an evaluation of the net cost of publicly funded education. When such public benefits as better health and fewer prisoners are added to the calculation of the private benefits of publicly funded education, the social optimum is shown to require a higher educational output than would be required if only the private benefits were taken into account. A similar shift would clearly apply to Citizen’s Basic Income, suggesting that calculations of net costs that take into account only revenue benefits (of the Citizen’s Basic Incomes) and private costs (of tax increases and changes to other social security benefits) need to be augmented by calculations that recognise that savings would accrue to better physical and mental health. Such augmented calculations would generate higher levels of Citizen’s Basic Income for the same tax increases and benefits changes. Another discussion in the book that would be relevant to any cost-benefit analysis of a Citizen’s Basic Income scheme would be that on distributional weights: that is, weights applied to benefits and costs according to the income levels of those receiving benefits or incurring costs. A scheme that redistributes from rich to poor fares better than one that redistributes in the opposite direction. To illustrate the method, the book contains a detailed cost benefit analysis of conditional cash transfer programs in Mexico and Kenya. It would be interesting to see such an analysis carried out for entirely unconditional cash transfer programs.

Graphs are used sparingly and appropriately: for instance, to explain consumer surplus (the difference between the benefit of a good or service to a consumer and the price paid), producer surplus (the difference between the benefit to the producer and the cost of production), and the marginal excess burden of taxation (the social cost of taxation reducing economic activity: a significant issue for any social policy that increases tax rates).

As the concluding chapter suggests, CBA is an essential public policy tool. It has been underused in relation to Citizen’s Basic Income illustrative schemes. Anyone who decided to repair that deficit would find this introduction a most useful guide.

 

 

 

 

Footnotes

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