Answer to Question #33245 in Economics of Enterprise for kunal Askurn
discuss the usefulness of a cost and benefit analysis in policy decision making. (15 marks)
Cost-benefit analysis (CBA) is one of the oldest methods of evaluating a project or a proposal or a policy. Standard economic theories claim that economic efficiency, measured by the difference between benefits and costs, should be the touchstone for making policy choices.
In recent years there has been an interesting debate about its utility in evaluating social and welfare policies and environmental regulations. Opponents point to the difficulty in identifying, quantifying and monetizing the marginal costs and benefits associated with these policies. They argue that such policies suffer from numerous externalities, both positive and negative, that are outside the framework of quantifiable parameters. Further, CBA is silent about issues like fairness and processes and distribution of costs and benefits. Regulatory policies with aggregate benefits exceeding aggregate costs will also have winners and losers.