Cost-benefit analysis: an uncertain guide to public policy

Area of Science:

• Decision Analysis
• Public Policy Analysis
• Risk Management

Background:

• Social planning often involves significant uncertainty.
• Formal approaches, like cost-benefit analysis, are widely used to manage this uncertainty.
• Cost-benefit analysis (CBA) evaluates proposed activities by comparing expected benefits against expected costs.

Purpose of the Study:

• To critically examine the inherent limitations of cost-benefit analysis in social planning.
• To identify the key challenges that hinder the effective application of CBA.
• To suggest ways to enhance the contribution of CBA in the management process.

Main Methods:

• Review of existing research on the reliability of human judgment in quantitative analysis.
• Analysis of the structural and procedural limitations of cost-benefit analysis.
• Examination of the applicability of CBA to broader management and policy issues.

Main Results:

• CBA is limited by the unavailability of reliable inputs, as human judgments of probability and value are often biased and labile.
• Assessing the quality of CBA is problematic due to a lack of systematic evaluation methodologies.
• CBA procedures struggle to address critical management issues such as political philosophy, implementation feasibility, and option generation.

Conclusions:

• The effectiveness of cost-benefit analysis is constrained by the unreliability of subjective inputs and assessment methods.
• Cost-benefit analysis has inherent limitations in addressing broader policy and management concerns.
• Improving CBA requires acknowledging its limitations, addressing tractable problems, and clarifying its role in decision-making.