Social Welfare Functions in Benefit-Cost Analysis: The ROPI Approach

1 ROPI TM refers to a software module now being commercialized as part of KTEC's KTRAK TM project tracking system for technology development. This paper describes part of the earlier research that led to development of the software module. Abstract The sole objective of government in " traditional " benefit-cost analysis is assumed to be maximizing dollars of aggregate generalized income. But empirically, government policy-makers have multiple goals (reflected, for example, in the multiple criteria used in nearly all economic development evaluations); and philosophically, " one dollar one vote " is inconsistent with " one person one vote. " This paper describes an approach for determining multiple weighted goals of citizens and introducing them into a formal benefit-cost analysis. This approach was operationalized in the ROPI (Return on Public Investment) model in Kansas. Goals, weights, discount rates, and measurable indicators for the goals were determined with a well-informed citizens' panel, using the " Analytic Hierarchy Process " [Saaty, 1980]. A replication of the panel led to similar results, except that investment-type goals were ranked differently relative to consumption-type goals. The implied social welfare function is a Cobb-Douglas function of aggregative variables that contain non-utility information as well as utility information. The concept of a " benefit-cost " ratio has to be reexamined within this framework. " Benefits " are differences in welfare between the world containing the program under evaluation, and a counterfactual world where program resources are simply wasted. " Costs " are differences in welfare between a world where the resources are handed over to taxpayers, and a world where the resources are wasted. It follows that general equilibrium modeling is essential. The problem of double counting also needs to be reexamined.