Book contents
- Frontmatter
- Contents
- Introduction
- PART I THEORETICAL ISSUES
- 1 Shadow prices and markets: Policy reform, shadow prices and market prices
- 2 Shadow prices and markets: Feasibility constraints: foreign exchange and shadow wages
- 3 Discount rates: The rate of discount for benefit–cost analysis and the theory of the second best
- 4 Risk and uncertainty: Uncertainty and the evaluation of public investment decisions
- 5 Income distribution: Allowing for income distribution
- 6 The costs and benefits of analysis: Project appraisal and planning twenty years on
- PART II HOW TO VALUE THINGS
- PART III CASE STUDIES
- Index
5 - Income distribution: Allowing for income distribution
Published online by Cambridge University Press: 24 November 2009
- Frontmatter
- Contents
- Introduction
- PART I THEORETICAL ISSUES
- 1 Shadow prices and markets: Policy reform, shadow prices and market prices
- 2 Shadow prices and markets: Feasibility constraints: foreign exchange and shadow wages
- 3 Discount rates: The rate of discount for benefit–cost analysis and the theory of the second best
- 4 Risk and uncertainty: Uncertainty and the evaluation of public investment decisions
- 5 Income distribution: Allowing for income distribution
- 6 The costs and benefits of analysis: Project appraisal and planning twenty years on
- PART II HOW TO VALUE THINGS
- PART III CASE STUDIES
- Index
Summary
CRITERIA FOR A WELFARE IMPROVEMENT
We often need to compare different economic states, none of which may be optimal. For example, if one is doing a cost–benefit analysis of a public motorway project, one wants to compare social welfare in two ‘states of the world’: state 0, where the motorway is not built, and state 1, where the motorway is built and the money to build it is raised in some specified fashion. This is called cost–benefit analysis because in comparing state 0 with state 1 we want to assess the additional benefits generated by the project minus the alternative benefits which would have been available but have been lost due to the project (i.e., the costs of the project). In principle one can do a cost–benefit evaluation of the effects of any action, be it private (getting married?) or public (subsidizing food?). How?
The action of shifting from state 0 to state 1 is to be judged by its effects on the happiness of all those affected. One can imagine two main possible types of outcome:
Someone gains and no one loses (or no one gains and someone loses).
Someone gains but someone else loses.
The Pareto criterion
Case 1 is illustrated by the move from P0 to P1 (figure 5.1 (a)). Whatever one's social welfare function (provided it is benevolent), this must be an improvement. The jargon describes such a change as a Pareto improvement.
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- Chapter
- Information
- Cost-Benefit Analysis , pp. 179 - 198Publisher: Cambridge University PressPrint publication year: 1994
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