Some of the problems that concern me with CBA are captured in the following
summary of objections to the sum of compensating variations
or aggregate willingness to pay test:
1. The ethical judgment impplied by the compensating-variation test
are not defensible. It treats increases in income as equally socially valuable
no matter who receives them. Social judgments--revealed by government policy--
and the overwhelming majority of individual judgments are not consistence with
this indifference toward inequality. NOTE: It seems that government policy is
not indifferent, it tries to increase social inequality overall.
2. A positive sum of compensating variations is not the same thing as an
improvement according to the Potential Pareto Principle. For example, a
move from one Walrasian equilibrium to another Walrasian equilibrium typically
yields a positive sum of compensating variations (the Boadway Paradox) even
though no 'efficiency gain' has occurred (there is no Potential Pareto
Improvement).
3) Although a positive sum of compensating variations is necessary for an
improvement according to the Potential Pareto Principle (when lump sum
transfers are feasible), it is not sufficient.
4) Neither the sum of compensating variations nor the Potential Pareto
Principle ranks social alternatives in a reasonable way. In order to eliminate
intransitivities over consumption efficient allocations, all households must be
assumed to have quasi-homothetic (NOTE: what sort of preferences are those?)
preferences that are identical at the margin. Even then distorted equilibria
are not ranked sensibly. (Blackorby and Donaldson, The Case Against the use of
the sum of compensating variations in cost-benefit analysis, Canadian Journal
of Economics 1990 pp.471-494. )
Most, but not all, of these objections apply also to the use of equivalent
variations, that is willingness to be paid rather than willingness to pay.
So how can CBA be justified and how can it avoid the charge that it must
implicitly measure value cardinally. A buck is a buck and you can add the damn
things up and that's what you bloody well do.
CHeers, Ken Hanly
P.S. Surely it is important that a technique that is widely used in every area
from forestrstry, to health care, to agriculture, to education should have some
theoretical justification that holds water. It seems to me that there are all
kinds of ideological features in the practice that are routinely ignored,
and that the technique is widely used (partly) because of whom it benefits,
and because it purports to mimic the efficiency results of ideal markets and
so creates the illusion of deductive rigor and objectivity that some economists
seem to think is characteristic of their "positive science" even though
practitioners admit the horrendous practical difficulties of measurement
involved.
I would be interested in references to the use of CBA in anthropology,
or any other references that deal with the conceptual and philosophical issues
involved in CBA. I have a short biblio that I can email people if they are
interested in the area.
