Benefit-Cost Analysis and Distributional Weights: An Overview

Benefit-cost analysis (BCA) evaluates policy choices by summing unweighted monetary equivalents, and is insensitive to distributional considerations. An established scholarly tradition proposes to use distributional weights in BCA-multiplying monetary equivalents by weighting factors that are inversely proportional to individuals' incomes.This article provides an accessible overview of the topic of distributional weights, with a special focus on environmental policy. The intellectual foundation for weights is the concept of a social welfare function (SWF). Two are considered: a utilitarian SWF and an isoelastic/Atkinson SWF, which incorporates an extra degree of inequality aversion.The article explains the concept of an SWF, discusses in detail how to specify utilitarian and isoelastic/Atkinson weights so as to mimic the corresponding SWFs, and uses the value of statistical life (VSL) to provide an example of weighting. The article then considers two important objections to distributional weighting: that interpersonal well-being comparisons (and thus weights) are undermined by preference heterogeneity, and that distributional considerations are best handled through the tax system. © The Author 2016. Published by Oxford University Press on behalf of the Association of Environmental and Resource Economists. All rights reserved.