Cost-Benefit Analysis has hit the headlines. In the controversies about the management of flood control, there are arguments about priorities, whether it’s right to sacrifice fields to protect houses downriver (yes, it is) , and how much money should be spent on prevention. There are several weaknesses in CBA: they include the acceptance of market values as equivalent to social value, the failure to compensate losers in one place for acts that benefit other people somewhere else, and a calculus which means that a small benefit to a lot of people can outweigh massive harm to a few. The Treasury does allow for adjustments to take into account distributional inequities, but there is a general problem that the assets of poorer people don’t have the same value as the assets of richer people.
Chris Smith, the Chair of the Environmental Agency, complained that the Agency was limited by a Treasury rule which insisted on a ratio of benefits to costs of 8:1. I don’t know where this figure came from; it’s not in the Treasury Green Book. In a parliamentary debate last July there were complaints from country landowners that their benefit-cost ratio is set at 18:1 while householders have theirs at 5:1. The difference doesn’t sound unreasonable, but it’s not what is being reported now.