Positive v. Normative Justifications for Benefit-Cost Analysis

What is the rationale for benefit-cost analysis (BCA)? The answer is critical for determining how BCA results should be interpreted, their implications for policy, and how BCA should be conducted. There are at least two possible bases for justifying BCA, positive and normative. The positive basis is that BCA identifies policy changes that satisfy the Kaldor-Hicks compensation test, so that those who benefit could hypothetically compensate those who are harmed. The normative basis is that BCA identifies social improvements, e.g., by approximating a utilitarian calculus or promoting more consistent decisions by protecting against cognitive error. When human behavior differs from that which is assumed in standard economic models, the justifications may conflict. Individuals whose behavior differs from the models may disprefer a change in circumstances that normative models predict they should prefer. The positive justification is consistent with respect for individual autonomy and provides clarity about methodological choices in the analysis but can require endorsing cognitive and behavioral errors that individuals would wish to avoid. The normative justification implies rejecting policies that the population prefers and requires determining what preferences are normatively acceptable. JEL classification: D61, D81, H40, Q50