Can One Conduct Cost-Benefit Analysis of a Policy?
By David Henderson
The answer to the question I asked in the title seems as if it should be “Yes.” And not just “yes,” but “Obviously yes.”
Yet economist John Whitehead says that one can’t conduct cost-benefit analysis of a policy. Specifically, he writes:
The costs of cap and trade do not outweigh the benefits. It might be the case that the costs of a climate policy, any climate policy, outweigh the benefits. But cap and trade is a policy instrument, not something for which you conduct a benefit-cost analysis. The economics says that if the government decided to undertake climate policy, cap and trade would be one of the most cost-effective ways of doing it.
Notice his third sentence. Cap and trade is a policy instrument. But, contrary to Whitehead, you can conduct cost/benefit analyses of policy instruments. You would compute the costs and compute the benefits. It might be difficult to get a handle on those things, especially on the benefits. But in principle it’s doable. So the answer to the question I raised in the title is “Yes.”
Whitehead seems to be saying that one can do only cost-effectiveness analyses of policy instruments. That’s true only if you can’t compute benefits.
By the way, in the same post Whitehead also addresses the issue of carbon taxes with offsetting reductions in other taxes. Although he doesn’t address the issue directly, I’ll bet dollars to doughnuts that he is not aware of this article and the important tax-interaction issue it addresses.
HT to Mark Thoma.