The Legal Foundation of Cost-Benefit Analysis

This paper proposes to provide a fully realized legal foundation for cost-benefit analysis (CBA). I refer to an approach based on such a foundation as benefit-cost analysis (BCA), a subcategory of mainstream CBA. This approach rests on legal rights and also amends the failure of CBA to include moral sentiments, which arose in the attempt to avoid interpersonal comparisons. This app[roach largely vitiates the extreme positions that have come to dominate thinking about CBA. In this paper I show the logical connection between CBA, the law and moral sentiments. I place CBA within the context in which it is most useful: that of providing information, not the decision. In Part One, I explicate the history of CBA and its underlying economic theory. I first show how deficiencies in CBA arose from its history and define a “mainstream” version of the dominant Kaldor-Hicks (KH) approach to CBA. I then develop the concept of a fully realized CBA under the rubric of BCA. That is, as a matter of convenience, I treat BCA as a better-defined subcategory of CBA. The purpose here is to show that the legal foundation for BCA tends to ameliorate or eliminate the criticisms of CBA. In Part Two, I consider empirical analyses of CBA and the extent to which BCA is becoming the preferred choice