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Efficiency vs. Welfare in Benefit–Cost Analysis: The Case of Government Funding

Published online by Cambridge University Press:  11 September 2024

Zachary Liscow  and
Cass R. Sunstein Open the ORCID record for Cass R. Sunstein [Opens in a new window]
Zachary Liscow*
Affiliation:
Yale Law School, Yale University, New Haven, CT, USA
Cass R. Sunstein*
Affiliation:
Harvard Law School, Harvard University, Cambridge, MA, USA
*
Corresponding authors: Zachary Liscow and Cass R. Sunstein; Emails: zachary.liscow@yale.edu; csunstei@law.harvard.edu
Corresponding authors: Zachary Liscow and Cass R. Sunstein; Emails: zachary.liscow@yale.edu; csunstei@law.harvard.edu
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Abstract

Both Republican and Democratic administrations make regulatory and funding decisions with close reference to benefit–cost analysis (BCA). With respect to regulation, there has been a great deal of academic discussion of BCA and its limits, but almost no attention has been paid to the role of BCA in government funding. That is a serious gap, not least in connection with climate-related risks, such as wildfire, drought, extreme heat, and flooding. Office of Management and Budget (OMB) Circular A-94 sets out guidelines for the BCA required when people are applying to many federal discretionary grant programs. Through Circular A-94, OMB has long required applicants to demonstrate that the benefits of their projects would exceed the costs. But under Circular A-94 as it stood for many years, efficiency-based BCA could produce results that fail to maximize welfare and that are also highly inequitable. The 2023 revision of Circular A-94 focuses more directly on welfare and equity, which are now – not uncontroversially – being brought directly into policy. At the same time, the new Circular A-94 raises fresh questions about how best to promote welfare, and to consider equity, in practice. This article explains the economic foundations for promoting welfare through distributional weighting – and how the old BCA guidance fell short. It then offers recommendations on how to operationalize distributional weighting on the ground specifically for government spending programs – and for BCA more broadly.

Keywords

administrative lawbenefit–cost analysisefficiencylaw and economicswelfareD61H50H54H23Q52R58D63K23
Type
Article
Information
Journal of Benefit-Cost Analysis , First View , pp. 1 - 28
Copyright
© The Author(s), 2024. Published by Cambridge University Press on behalf of Society for Benefit-Cost Analysis

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