Abstract

Cost-benefit analysis —understood as a technique for evaluating governmental policies in light of individual well-being—rests upon a preference view of welfare. A policy’s effect on a given individual is measured, on a money scale, with reference to her preferences as between money and other goods, captured in her “utility” function. This chapter describes the methodology of CBA, and discusses the various conditions on individual preferences that are required for the existence of an individual utility function, for the use of money as a scale for measuring policy effects, and for a nexus between an individual’s preference-satisfaction and her well-being. The chapter then turns to the topic of interpersonal welfare comparisons. Although CBA is often defended with reference to the criterion of Kaldor-Hicks efficiency, which eschews such comparisons, a more plausible defense embraces them and sees CBA as an approximation to a social welfare function.