Today’s lecture: What is costbenefit analysis and is it ethical?
But first… a recap of the
Invisible hand versus the
Tragedy of the commons
The big question: What does a
world full of selfish jerks look like?
• 
• 
• 
• 
Tragedy of the commons: It looks terrible!
Invisible hand: It looks awesome!
Therefore…
Tragedy of the commons: We need
“mutual coercion mutually agreed
upon” (government or other collective
action) to stop us from destroying
ourselves.
•  Invisible hand: We just need to “leave all
creative energies uninhibited.”
Invisible Hand versus
Tragedy of the Commons
The big question: What does a
world full of selfish jerks look like?
•  Tragedy of the commons: It looks terrible!
•  Invisible hand: It looks awesome!
•  Tragedy of the commons: Traffic
congestion, overfishing, pollution, sea
otters, etc.
•  Invisible hand: The pencil, FedEx, the Ave,
consumer goods, look around!
•  So which metaphor is correct?
•  They both are (depending on the situation)
The big question: What does a
world full of selfish jerks look like?
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
48%
43%
7%
0%
5
4
3
2%
2
1. 
2. 
3. 
4. 
5. 
1
•  If we’re in a tragedy of the commons
situation (e.g., climate change), how do we
decide what sort of collective action to
pursue?
•  One option: Use cost-benefit analysis.
Cost-benefit analysis is a
Good Thing™ (mostly)
1
You can put a value on human life.
1. 
2. 
3. 
4. 
5. 
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
33%
30%
20%
14%
The value of human life in India is
less than in the U.S.
1. 
2. 
3. 
4. 
5. 
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
40%
24%
22%
10%
1.  Aquifers running
dry
2.  An imaginary
polluted city near
New York
3.  Loss of songbirds
24%
3
We should use DDT on malaria
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5%
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3
2
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%
18%
2
14%
1.  Strongly Agree
2.  Agree
3.  Neutral
4.  Disagree
5.  Strongly Disagree
77%
1
5
4
3
62%
1
Rachel Carson (1907-­‐64) According to Tina Rosenberg, Rachel
Carson didn’t consider
1.  DDT impacts on
farmworkers
2.  DDT impacts on
malaria
3.  DDT impacts on
wildlife
2
“Silent Spring” is a metaphor referring to
Historical perspectives
•  1962: Silent Spring
•  1969: Natl.
Environmental Policy Act
(requiring Enviro Impact
Statements)
•  1970: Creation of EPA
•  1970+: Clean Air Act
•  1972+: Clean Water Act
•  1972: U.S. bans DDT
•  1973: End. Species Act
1
5
4
3
4%
2
1
5%
2
CBA: The basic idea
CBA: The basic idea
•  Should we keep things the way they are,
or should we make a change?
•  If we’re currently living in world A, should
we stay in world A or move to world B?
A
A
•  Let’s look at the benefits for the winners
(How much are you willing to pay to move
from A to B?) and at the costs for the
losers (How much would you need to be
paid to move from A to B?).
A
A
???
???
B
B
According to Kristof, sweatshops are better
than work in…
CBA: The basic idea
•  The cost-benefit test: Do the benefits
exceed the costs?
•  With repeated use over time, everybody
wins. (Sounds like “mutual coercion”…)
A
1.  A garbage dump
2.  A brothel
3.  Ship-breaking
86%
9%
5%
A
???
1.  Strongly Agree
2.  Agree
3.  Neutral
4.  Disagree
5.  Strongly Disagree
80%
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12%
%
$
#
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!
4
3
2
3%
"
5%
1
3
Sending polluting industries to
poor countries is good.
The Larry Summers Memo advocates
sending what to poor countries?
1.  DDT
2.  Labor-intensive
sweatshop jobs
3.  Polluting
industries
4.  Financial aid
2
1
B
3
Sending sweatshop-type jobs to
poor countries is good.
1.  Strongly Agree
2.  Agree
3.  Neutral
4.  Disagree
5.  Strongly Disagree
#%&
•  CBA is an economic tool to help make
controversial public policy decisions.
•  CBA is based on the philosophy of
utilitarianism (Bentham, Mill, “greatest
good for the greatest number”). It is
unabashedly anthropocentric.
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What is Cost-Benefit Analysis?
What is Cost-Benefit Analysis?
•  CBA is an economic tool to help make
controversial public policy decisions.
•  CBA is based on the philosophy of
utilitarianism (Bentham, Mill, “greatest
good for the greatest number”). It is
unabashedly anthropocentric.
•  CBA is about preferences, not money!
•  CBA can be informational or mandatory.
77%
1.  Yes
2.  No
3.  Not sure
16%
3
6%
2
•  Richard Posner: “If the government and the
taxpayer and the voter all know—thanks to costbenefit analysis—that a project under
consideration will save 16 sea otters at a cost of
$1 million apiece, and the government goes
ahead, I would have no basis for criticism.”
•  The big idea: Let’s look and understand our
options before making a decision.
Do you support the informational
use of cost-benefit analysis?
1
Informational CBA
4
Do you support the mandatory use
of cost-benefit analysis?
54%
21%
Should rural and urban households have
the same water quality standards?
78%
1.  Yes
2.  No
3.  Not sure
17%
Should rural and urban households have
the same water quality standards?
48%
1.  Yes
2.  No
3.  Not sure
34%
•  Arsenic occurs naturally in some water
systems (and is human-caused in others).
•  Long-term exposure can cause cancer.
•  Reducing levels from 50ppb to 10ppb may
save 20-30 lives nationally.
•  Urban areas: $0.86/household per year.
•  Rural areas: $300/household per year.
Example: Newborn screening
•  Should all newborn babies be screened for
rare diseases that are fatal if undetected?
•  Example: Maple syrup urine disease
(MSUD) can lead to brain damage and
death; it affects 1 in 100,000 infants (about
1 a year in Washington State).
•  Imagine that you are a representative on a
citizens’ budget panel.
3
2
18%
1
Example: Arsenic in drinking water
3
2
1
5%
25%
3
1.  Yes
2.  No
3.  Not sure
1
•  CBA is a legal requirement for many
federal and state agencies.
•  Revised Code of Washington RCW
34.05.328: “Before adopting a rule… an
agency shall…determine that the probable
benefits of the rule are greater than its
probable costs…”
•  The big idea: CBA is a good idea,
especially compared to the alternative.
2
Mandatory CBA
5
Should taxpayers pay $1 per
baby to screen for MSUD?
1.  Yes
2.  No
3.  Abstain
Should taxpayers pay $0.10 per
baby to screen for MSUD?
1.  Yes
2.  No
3.  Abstain
57%
40%
67%
31%
4%
3
52%
21%
8%
5%
1
2
3
Should India pay $1 per baby to
screen for MSUD?
The value of human life in India is
less than in the U.S.
1. 
2. 
3. 
4. 
5. 
76%
20%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
39%
29%
18%
9%
5%
1
4%
1
2
5
1.  Yes
2.  No
3.  Abstain
8%
4
1
12%
5
11%
Strongly Agree
Agree
Neutral
Disagree
Strongly Disagree
4
1. 
2. 
3. 
4. 
5. 
84%
3
You can put a value on human life.
3
1.  Yes
2.  No
3.  Abstain
2
3
Should taxpayers pay $100 per
baby to screen for MSUD?
1
2
2
2
1
1%
3
6
CBA and the Clean Air Act
•  “How do the overall health, welfare, ecological,
and economic benefits of Clean Air Act
programs compare to the costs of these
programs?”
•  EPA 1997 (looking at 1970-1990): Costs of $0.5
trillion, benefits of ≈$6 - 49 trillion.
•  But Clean Air Act says that air quality standards
should be set to protect human health (including
vulnerable populations). Translation: No CBA or
cost consideration.
Should the U.S. use CBA to
determine air quality standards?
1.  Yes
2.  No
3.  Abstain
71%
25%
4%
1
2
3
7