Accounting for the Distribution of Benefits and Costs in Benefit-Cost Analysis

Benefit-cost analysis (BCA) is often viewed as measuring the efficiency of a policy independent of the distribution of its consequences. The role of distributional effects on policy choice is disputed; either: (a) the policy that maximizes net benefits should be selected and distributional concerns should be addressed through other measures, such as tax and transfer programs or (b) BCA should be supplemented with distributional analysis and decision-makers should weigh efficiency and distribution in policy choice. The separation of efficiency and distribution is misleading. The measure of efficiency depends on the numeraire chosen for the analysis, whether monetary values or some other good (unless individuals have the same rates of substitution between them). The choice of numeraire is not neutral; it can affect the ranking of policies by calculated net benefits. Alternative evaluation methods, such as BCA using a different numeraire, weighted BCA, or a social welfare function (SWF), may better integrate concerns about distribution and efficiency. The most appropriate numeraire, distributional weights, or SWFs cannot be measured or statistically estimated; it is a normative choice.