Benefit–Cost Analysis and Distributional Weights: An Overview

Benefit–cost analysis (BCA) evaluates governmental policies by summing individuals’ monetary equivalents, and is insensitive to distributional concerns. BCA does not take into account whether those made better off by a policy have higher or lower incomes, or higher or lower levels of nonincome welfare-relevant attributes (e.g., health), than those made worse off. Arguably, distributional considerations should be incorporated into BCA via “distributional weights.” A scholarly literature dating from the 1950s endorses distributional weights and analyzes how to specify them (Meade 1955, chap. 2; Weisbrod 1968; Dasgupta and Pearce 1972; Dasgupta, Sen, and Marglin 1972; Little and Mirrlees 1974; Squire and van der Tak 1975; Boadway and Bruce 1984, pp. 271–81; Brent 1984; Ray 1984; Drèze and Stern 1987; Drèze 1998; Cowell and Gardiner 1999; Yitzhaki 2003; Johansson-Stenman 2005; Creedy 2006; Liu 2006; Fleurbaey et al. 2013; Boadway 2016). Distributional weights were adopted, for a time, at the World Bank (Little and Mirrlees 1994). They are currently recommended by the UK’s official BCA guidance document (HM Treasury 2003, pp. 91–94). However, it appears that distributional weights have rarely if ever been used by BCA practitioners in the U.S. government, and the parallel U.S. guidance document does not mention them (Office of Management and Budget 2003). This article, which is part of a symposium on Distributional Considerations in Benefit–Cost Analysis, provides an introduction to distributional weights. The fulcrum for my discussion will be the concept of the social welfare function (SWF). The SWF is a fundamental construct in many areas of welfare economics, including optimal tax theory, growth theory, and analysis of climate change. BCA with distributional weights, in turn, is a practicable method for implementing an SWF. This is the view of BCA running through the literature on distributional weights, and is presented here. This account of BCA is quite different from the familiar view that sees BCA as a tool for implementing the criterion of Kaldor–Hicks efficiency (potential Pareto superiority). The