This is the second in a series of four blogs featuring key excerpts from the writings of our founder and past president, Richard Zerbe. His insights shaped the foundation of our association and remain relevant to today’s challenges. We hope these selections offer valuable perspectives to all members.
The treatment of moral sentiments in Cost-Benefit Analysis (CBA) has had an ambiguous role since Kaldor’s assertion that judgements about distributional effects should be left to the politician. Yet, Benefit-Cost Analysis (BCA) provides a straightforward approach for evaluating moral sentiments: moral sentiments should be valued as with any other good by determining the Willingness to Pay (WTP) or Willingness to Accept (WTA) for their realization.
An objection to inclusion of moral sentiments is that if we include their values, we will also need to treat immoral sentiments so both should be avoided. This is perfectly backward. BCA would recognize both moral and immoral sentiments, for, one man’s morality is another’s immorality. Critics of including moral sentiments raise utility monster cases.[1] These are cases in which utility from bad actions is multiplied until harm exceeds any gains. For example, say, Donald and his friends like to beat up Joe. The disutility to Joe will, we presume, be greater than the utility from the beaters. Now let’s increase the number of beaters until the summed utility of the beaters exceeds that of the loss to Joe. So, it might seem that immoral sentiments should not count.
These and similar questions are ones of theconcept of standing in BCA.[2] Consider the situation in which the criminal thief values the goods more than its owner. BCA would hold that the value to the thief of the stolen goods would not count, as the thief’s gain of the goods is illegal. That is, the thief has no standing to claim the goods. Illegality is a legal statement resting on a social norm that is reasonably said to embody the social judgement that the WTP to avoid theft is greater than the WTP to allow it. Under BCA, illegality embodies the sentiments (or the WTP) of the larger population that beating should be illegal. Only where the question is whether an action should be legal or illegal should the sentiments of criminals be counted. Now there may of course be unclear law or bad law or the issue of changing law/changing the law. Here, for the purposes of BCA, the analyst would address the value of the law itself. If for example, policy makers seek to decriminalize a drug, users of the drug, who may previously not have had standing, must now be given it.
Consider, the following problem: The Dominican Republic has a set of wealthy gated communities on the one hand and a large number of very poor people elsewhere.[3] The gated communities have well-functioning services such as piped water supply, piped sewage disposal, reliable grid supplied electricity, police forces providing complete security, paved roads and well-tended landscaping, excellent schools, etc. The corresponding services in the rest of the country are very inadequate. The inhabitants of the gated communities are unwilling to pay for services to the rest of the population. Despite the poor getting some income from working in the gated communities the WTPs for those services summed over the non-rich are below the costs of providing even minimally acceptable services. In the absence of donations from outside the country it would be very difficult for the poor to advance without some redistribution of income. How would the BCA analyst proceed?
Consider four paths: First, the analyst is stymied. Second, one can attribute a right to adequate services by the poor. In this case, the measure of value for the poor would be the WTA, which would be much larger than their WTP. Third, one could consider excess deaths by the poor and, given a right to life, the value of life savings would be a WTA estimate. Finally, one could consider that the BCA client is not the DR but the United Nations who wish a WTA estimate on the grounds of their concept of rights. The resolution of such options is a matter of determining standing*.
[1]. These have led economists to ignore bad utility without a rationale. BCA provides a rationale consistent with CBA, namely that illegality suggests opposite sentiments overpowering bad utility.
[2] Other questions include should costs to fetuses be counted? Should the educational benefits provided to the children of illegal immigrants be counted? Should the gains of the criminal from theft be counted? What if the goods are more valuable to the criminal thief than to the owner? (Whittington and McCrae, Zerbe 1991, 2008).
[3] This problem was suggested to me by Richard Hamilton.
From the Editor:
* “Standing” is a term of art. It does not refer to law.
From Robinson et al (2019):
“Standing refers to identifying whose benefits and costs will be counted. The analysis may, for example, consider impacts on only those who reside or work in a specific country or region, or may address international impacts. This concept is related to the concept of “perspective” in CEA. For example, a CEA may be conducted from the societal perspective, in which case all impacts are included, or from the perspective of the health care sector, in which case only the impacts on that sector are considered.”