This paper presents a case against the use of the sum of compensating variations as a cost-benefit test. The authors argue that (1) the ethical judgments implied by the test are not defensible; (2) positive sums of compensating variations occur without potential Pareto improvements, resulting in...

The article begins by summarizing the arguments that lie behind the use of first-best models and notes the inappropriateness of using these results in what is patently a second-best world. Using several well-known examples from the literature, it is claimed, that if second-best considerations...