Abstract

Benefit-cost analysis (BCA) is typically defined as an implementation of the potential Pareto criterion, which requires inclusion of any impact for which individuals have willingness to pay (WTP). But this definition is incompatible with the widely agreed upon exclusion of certain impacts such as rights and distributional concerns, because, as I demonstrate, individuals do have WTP for these impacts. I propose a new definition: BCA should include only those impacts for which we believe consumer sovereignty should govern. This definition is rooted in the observation that WTP, as a measure of value, implicitly preserves consumer sovereignty, and is thus only useful and appropriate for impacts for which that is what we desire. I propose a practical rule for implementing my definition in real-world BCA, based primarily on the contention that any rule should be biased against inclusion of impacts that should not be included, so-called type II error. I test my rule against some common impacts that, by consensus, are either included or not included, and include that in practical application it performs well.