Cost-Benefit Analysis in Public Decision Making: A Comparative Study

1. ApplicationsCost Benefit Analysis, many hands problem Lecture 5

2. Socialcost benefit analysis • Governments must compare policy alternatives, e.g. build a bridge or dig a tunnel, build a new airport or status quo, imposetobacco ban or not • Compare in terms of futureadvantagesanddisadvantages • Use a metrictocompare • Utility? Most often: money • Monetizeall (or most of) the benefits andcosts • Recalculatetothesameyear (with interest rate)

3. Benefits andcoststhat do not have a market price • Casualties, wounded • CO2 emissions • Noise • Nature, environment • Different methods • What are thecostsif we reduceit? e.g. plant trees toreduce CO2 • Willingnesstopay • Willingnessto accept

4. CBA of CBA… • Rationalizes public decision making • Lesssubjective • Forcesonetoincludeall relevant considerations • Provides common ground • Never complete • Someestimates are veryuncertain

5. CBA of increase speed limit to 130 km/h 2011 Dutch Ministry of infrastructureand watermanagement  Benefits?  Costs?

6. Determination Benefits Costs Fuelcosts price x liters Emissions plant trees Nature  WTP / WTA / intrinsicvalue? Deaths 2 million/person, via WTP Wounded hospitalcosts Noise WTP / WTA / costs of building noisebarrier • Travel time  averagesalary x time

7. Weighing • Utilitarian: addandsubtract or calculate B/C ratio • Non-utilitarian: constraints, thresholds

8. Actual 2011 report • Nature: impact on species / habitats • Emissions: European norms • Actualinvestmentstobuildnoisebarriers • Actualinvestmentstomitigatecasualties • Justification of the analysis is not explicit andcanbecriticized: • Do human lives have a price? • Are allvaluescommensurable? • Value of nature: dependent on our WTP? • Futuregenerations? • Discount rate = market interest rate? • etc

9. Problem of Many Hands • Something bad happens due to collective human conduct • But difficult or impossible to pinpoint individual responsibility  Problem: collective responsibility but no individual responsibility

10. Criteria moral responsibility A person is morally responsible if something goes wrong if: • He did something wrong - Wrong doing • He did not act under coercion and could have acted differently – Freedom • He caused the bad state of affairs – Causality • He could have known that his action would cause the bad state of affairs - Knowledge

11. Responsibility Can also sometimes be assigned to collectives like • Organizations (firms, NGO’s, governments) • Groups (people playing soccer in the park) • Occasional collections (bystanders who can prevent something together)  Have / ought to have a collective aim.

12. Importance of assigning responsibility • Retribution • Correction • Prevention

13. PMH: gap collective responsibility - individual responsibility, for example Collective Individual Wrong doing Freedom Causality Knowledge • Wrong doing • Freedom • Causality • Knowledge

14. Examples • Oil spill Mexico BP • Herald Free Enterprise • Citicorp building • Climate change

15. BP Oil Spill: Who is toBlame? https://www.youtube.com/watch?v=txmb-Tzxyd8 BP, Haliburton and Transocean blamed each other. National Commission, installed by Obama: “clear mistakes” [but] “though it is tempting to single out one crucial misstep or point the finger at one bad actor (..) any such explanation provides a dangerously incomplete picture” BP: “a complex and interlinked series of mechanical failures, human judgments, engineering design, operational implementation team interfaces came together to allow (..) the accident.

16. How to deal with PMH cases? Three models: • Hierarchical model: top management is responsible • Collective model: each member is responsibleforthewhole • Individual model: each member is responsible in relationto his/her contribution (seesection 9.4 fromthechapter on this)