A key tool in the modern analysis of policy is benefit–cost analysis. Though its origin goes back to the remarkably prescient paper of Dupuit (1844), its theoretical development came much later, after the “marginal revolution” of the 1870s, and its practical application really dates only from the period after 1950. The underlying theory is that of the notion of economic surplus, to which, after Dupuit, such major figures as Marshall, Pareto, Hotelling, Allais, and Debreu have contributed: for a remarkable synthesis, see Allais (1981).

Without going into technical details, the essential steps in the actual calculation of a surplus depend on using choices made in one context to infer choices that might be made in different contexts. If we find how much individuals are willing to pay to reduce time spent in going to work by one method, e.g., buying automobiles or moving closer to work, we infer that another method of achieving the same saving of time, e.g., mass transit or wider roads, will be worth the same amount. Frequently, indeed, we extrapolate, or interpolate; if it can be shown that the average individual will pay $1,000 a year more in rent to reduce his or her transit time by 30 minutes, we infer that a reduction of 15 minutes is worth $500. This is all very much according to Dupuit's reasoning; he would value an aqueduct by the amount that individuals would be willing to pay for the water to be transported in it (and vice versa, if the opposite inference is useful).