A Discussion of Cost-Benefit Analysis

by Levi Russell

One of my favorite economics blogs is Cafe Hayek. Don Boudreaux, professor of economics at George Mason University, does a great job of using the economic thought of Alchian, Buchanan, Coase, Demsetz, and others to criticize popular fallacies and the perspectives of other professional economists.

Recently Boudreaux posted a couple of discussions on cost-benefit analysis. Below I reproduce key segments of these posts.

Boudreaux is clearly a fan of cost-benefit analysis, but he has a unique take on precisely who is best positioned to conduct such an analysis:

In this light, the benefit of moving consistently in the libertarian direction is that, to the extent that this movement is successful, one result is that both the number and the reliability of cost-benefit analyses increases. In the absence of the FDA and its prohibitions, each individual – with or without the consultation of his or her physician (as he or she chooses) – would make a series of personal cost-benefit analysis, throughout time, regarding various medical options.

This decentralized process of cost-benefit analyses would be on-going. Every hour of every day, each of many individuals would be doing his or her own cost-benefit analysis. And because each of these cost-benefit analysts would, unlike those who conduct cost-benefit analysis on government programs, (1) have more of his or her own money on the line, and, more significantly, (2) have his or her own health at stake, the results of these countless cost-benefit analyses would be much more reliable than are the results of unavoidably only occasional and information-thin cost-benefit analyses conducted on the overall effects of FDA policies and other government actions.

So, yes, by all means let’s have more – and more trustworthy – cost-benefit analysis. One of best means of achieving this happy result in matters of Americans’ health care is to abolish the FDA. To support the retention of the FDA – to support the retention of this agency’s current ability to prevent Americans from using whichever medical products they individually choose – is to oppose maximum possible cost-benefit analyses.

He follows that post up with another example:

Let me put this last point somewhat differently: if the income gains, from a minimum wage, captured by some people are to be counted as ‘benefits’ to be weighed against the losses of other people – and if these gains can in principle be so high relative to the losses that the minimum wage passes a cost-benefit test that then is used to support the minimum wage – then there is flung open a Pandora’s box of utilitarian horrors.

For example, someone (call him CB) might propose that the state prohibit the employment of all blacks under the age of 20. CB would correctly point out that, while his policy would obviously have some losers, it would also produce winners – namely, the wages of non-black, mostly young workers will increase as a result. And he’d be correct. I can also imagine that, in reality, the measured increase in the aggregate pay of this policy’s winners would be larger than the measured decrease in the aggregate pay of its losers (especially if we confine “losers” only to the black teenagers who lose jobs). Yet who would counsel that we should, therefore, withhold judgment on CB’s proposed policy until a cost-benefit analysis is conducted? Who would think it to be “libertarian” or “one-sided” or “unscientific” to prejudge as unacceptable a policy of prohibiting the employment of blacks under the age of 20?

Here are a couple of related short posts:

This one, by Jon Murphy, one of Boudreaux's PhD students, tackles the issue of aggregation in cost-benefit analysis. Another by Roger Meiners at the Property and Environment Research Center examines the use of cost-benefit analysis by the Environmental Protection Agency.