Economic Principles for BCA
Although the general economic principles for BCA are well-established, there are often important controversies that remain. A continuing matter of debate pertains to the selection of the discount rate used to weight future benefits and costs. The article by Harberger and Jenkins (2015) examines different approaches to estimating the social rate of discount, which they estimate to be around 8% for advanced countries and higher for developing countries. Partial equilibrium models generally facilitate BCA, but some policy ramifications may have general equilibrium effects. The article by Farrow and Rose (2018) explores the commonalities and differences between applying these two approaches in BCA. The fundamental guidance for BCA usually focuses on assessing benefits based on the public’s willingness to pay for the benefit. This approach is natural in the case of policies that generates benefits, but if there is a loss should one instead use a measure of the public’s willingness to accept the loss? The article by Hammitt (2015) develops the underlying economic theory, while the article by Knetsch, Riyanto, and Zong (2012) provides the argument on behalf of using a willingness-to-accept measure for benefit assessment, outlining the situations in which they believe this approach is pertinent.
Risk-related concerns also arise in the theory of BCA. In many instances risk and uncertainty is so great that policymakers are in a situation of ignorance. The article by Roy and Zeckhauser (2015) examines the role of ignorance, drawing on a variety of policy examples as well as treatment of ignorance in the literature. The most consequential risks addressed by government policies are mortality risks, which are monetized using estimates of the value of a statistical life (VSL). The article by Sunstein (2013) explores many of the ethical and distributional concerns that arise in applying the VSL in policy situations. Voluntary decisions fit nicely into standard economic frameworks, but what if the commodity involved is an addictive good? The article by Cutler, Jessup, Kenkel, and Starr (2015) examines addiction related issues, focusing particularly on smoking regulations.