Distribution matters in cost-benefit analysis: comment on K.A. Brekke

Article Abstract:

K.A Brekke's paper on the importance of distribution in cost-benefit analysis for project evaluation has brought the flaws of the aggregate benefit criterion (ABC) to the surface. Per-Olov Johansson disputed Brekke's assertion that the numeraire is important in cost-benefit analysis by claiming that the problem of numeraire dependence does not exist when net benefits are aggregated on the basis of the marginal social utilities. Despite its flaws, however, the ABC criterion is popular among practitioners.

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Does the choice of numeraire matter in cost-benefit analysis?

Article Abstract:

K.A. Brekke's paper on the importance of the numeraire in the cost benefit analysis of a project is deeply flawed. On the contrary, the social profitability of a project is independent of the choice of numeraire because the marginal social utility of income attributed to various groups must be determined to analyze social desirability. Thus, a more rational approach to project evaluation would be to demonstrate how the project's benefits and costs are distributed across various types of households.

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Reply to J. Dreze and P.-O. Johansson

Article Abstract:

The importance of the numeraire in cost benefit analysis for the social desirability of a project has been disputed by Per-Olov Johansson in an article. Jean Dreze, meanwhile, pointed out the theoretical flaws of the aggregate benefit criterion in the light of the numeraire problem. However, the choice of numeraire for aggregation is important if the aggregate information about the group of household defined by the household type is the unweighted average benefit within that group.

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