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1 Introduction: issues and approach
Cost-benefit analysis (CBA) draws on some key principles of economics and is one of the most practical uses of economics. In this paper, I examine the relationship between economic principles and practice. To do this, I select eight major issues for CBA, describe how these issues are formulated in Boardman et al. (2018), the leading international textbook on CBA, and examine how these issues are dealt with in seven official guidelines. Where differences emerge, as they do, I briefly discuss whether these differences can be justified either in principle or on practical grounds, such as the need for consistency across CBA studies.
The eight selected issues are: (i) standing, (ii) core valuation principles [compensating variation (CV) or equivalent variation (EV) welfare premise] and use of willingness to accept (WTA) values, (iii) the scope of CBA studies, including secondary markets, additional economic benefits, and multipliers, (iv) changes in real values over time, (v) the marginal excess tax burden (METB), (vi) choice of the social discount rate (SDR), (vii) use of benefit-cost ratios (BCRs), and (viii) treatment of risk.
The seven guidelines reviewed are UK Treasury (2018), European Commission (2014), U.S. Environmental Protection Agency (USEPA, 2014), New Zealand Treasury (2015), and three Australian guidelines: Infrastructure Australia (IA, 2018), NSW Treasury (2017), and Victorian Department of Treasury and Finance (2013). These guidelines were selected as contemporary, produced in the last six years, in some cases as updated editions, and for global spread. The USEPA guide is chosen as an extensive current U.S. guide and based on official U.S. Office of Management and Bureau guidelines (e.g., OMB, 2000, 2003). The major Canadian guide (Canadian Treasury Board, 2007) was not selected as it describes CBA for regulations, not for public investment, and does not deal with most of the eight selected CBA issues. The Australasian selections reflect the importance attached to CBA in Australasia as well as the author’s immediate experience.
Two further introductory remarks should be made. First, the Editor of the much-cited “Green Book” (UK Treasury, 2018) pointed out to me (email, 5 June 2019) that this is intended as a “guide for public officials,” not as a “textbook on techniques such as CBA” which are to be found separately in “the academic...