The Limits of Cost/Benefit Analysis When Disasters Loom

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Advances in estimating the costs and benefits of climate change policies are a welcome development, but a full-scale cost/benefit analysis that seeks to reduce complex value trade-offs to a single metric of net benefit maximization hides many important public policy issues, especially for disasters and catastrophes that are large, discontinuous, irreversible and uncertain. States should obtain public input on such policies. These policies involve value trade-offs that can be informed by technocratic estimates of costs, benefits and risk. However, such analyses cannot, in principle, be reduced to a single recommendation that ‘maximizes net benefits’. Politicians must make value trade-offs informed both by technocrats and by public input.

Policy Implications

  • Policies that seek to limit the risks of potential disasters and catastrophes – that are large, discontinuous, irreversible, and far in the future – should be informed by technocratic estimates of costs, benefits and risk.
  • However, such analyses cannot, in principle, be reduced to a single recommendation that ‘maximizes net benefits’. The applied utilitarianism of cost/benefit cannot resolve such problems.
  • Policy makers should obtain public input as they make the necessary value trade-offs.
  • Once the basic policy choice has been made, the next step is a detailed allocation of costs. Those decisions involve an interplay of technical details with choices about the distribution of costs between general taxpayers, producers and users of a service (e.g. electric power), citizens affected directly by the policy in their homes and businesses and other competing values (e.g., preservation of natural areas). Such choices are not limited to policies that concern disasters; they are pervasive in all public policy choice, but they too cannot be reduced to the logic of cost/benefit analysis (CBA) which treats all benefits and costs equally.
  • CBA is a valuable tool in many contexts, but its limits are particularly obvious in the case of policies that seek to prevent disasters and catastrophes.
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