Implementing Cost-Benefit Analysis When Preferences Are Distorted

Abstract

Cost-benefit analysis is routinely used by government agencies in order to evaluate projects, but it remains controversial among academics. This paper argues that cost-benefit analysis is best understood as a welfarist decision procedure and that use of cost-benefit analysis is more likely to maximize overall well-being than is use of alternative decision-procedures. The paper focuses on the problem of distorted preference. A person\u27s preferences are distorted when his or her satisfaction does not enhance that person\u27s well-being. Preferences typically thought to be distorted in this sense include disinterested preferences, uninformed preferences, adaptive preferences, and objectively bad preferences; further, preferences may be a poor guide to maximizing aggregate well-being when wealth is unequally distributed. We argue that government agencies currently recognize these problems but respond to them in an ad hoc way, and that a more systematic treatment of these problems is warranted. The paper describes conditions under which agencies should correct for distorted preferences, for example, by constructing informed or non-adaptive preferences, discounting objectively bad preferences, and treating people differentially on the basis of wealth