Cost–Benefit Analysis (Elements in Public Economics)

By: Per-Olov Johansson and Bengt Kriström

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Synopsis: This Element on cost-benefit analysis provides a summary of recent theoretical and empirical developments and summarizes state-of-the-art stated-preference and revealed-preference valuation methods. The Element discusses how to assess small (or marginal) as well as large (or non-marginal) projects that have a significant impact on prices and/or other economic variables. It also discusses distortions like taxes, market power, and sticky prices. In addition, risk/uncertainty is considered. A novel feature is the elaboration on flexible evaluation rules for reasonably small projects. Conventional point-estimates of projects should be used with care, because they typically give biased results.