Cost Benefit Analysis Caveats
- Garbage in Garbage out. Bad assumptions can distort analysis.
- Who ARE the stakeholders?1
- Externalities. Easy to omit side-effects.
- Easy to forget to pay attention to what's happening at the margin — we focus on the total and don't notice that a little more investment might provide lots of benefit.
- Estimation of costs and benefits is hard.
- Intangibles hard to value
- Opportunity costs distorted by availability
- Opportunity costs easy to miss.
- Claimed willingness-to-pay may be unreliable
- Mixed (high/low) mis-estimates can totally muddy output. Important to slant all assumptions in same direction.
- Distributional effects DO matter, but in its traditional form, benefit-cost analysis does not address distributional issues.
- False impressions of precision and objectivity
Best Practices to Meet Challenges
- Explore unexpected side-effects
- Look for sensitive dependence on assumptions
- Structure process so that finer analysis can be performed as better information becomes available.
- Use willingness-to-pay, if even only as a thought experiment
- Defer pricing intangibles until late in process.