An Assessment of Important Issues Concerning the Application of Benefit-Cost Analysis to Social Policy

Abstract

Benefit-cost analysis (BCA) provides a framework for systematically assessing the efficiency of public policies. Increasingly, BCA is being applied to social policies, ranging from preschool interventions to prison reentry programs. These applications offer great potential for helping to identify policies that offer the best returns on public investments aimed at helping the disadvantaged or otherwise improving social life. However, applying BCA to social policies pose a number of challenges. The need for a comprehensive approach to assessing social policies generally requires making predictions based on data from multiple sources and using available shadow prices. As these predictions and shadow prices are inherently uncertain, special effort must be made to explicitly address the resulting uncertainty of predictions of net benefits. Prediction and valuation are complicated by behaviors, such as addiction, that do not clearly satisfy the assumptions of neoclassical welfare economics. As distributional goals are often an explicit motivation for social policies, BCA may be an incomplete framework for public policy purposes unless analysts can find ways to incorporate people's willingness to pay for changes in the distribution of consumption across society. If BCA is to reach its potential for contributing to good social policy, analysts must be aware of these challenges and researchers must help address them.