Coping with preference anomalies in cost-benefit analysis

Research output: Contribution to journalArticle

Abstract

Economics conventionally assumes that preferences are coherent, i.e. stable, context-independent, and consistent with axioms of rationality. Since these assumptions underpin standard interpretations of cost-benefit analysis (CBA), preference 'anomalies' found in stated preference surveys pose severe problems. This paper proposes an alternative interpretation of CBA as the simulation of the workings of competitive markets in situations in which, in reality, there is market failure. The object of a CBA of a project is to measure the surplus that is created by that project. It is shown that surplus can be defined without assuming that individuals have coherent preferences. Some of the ways in which this approach to CBA can overcome problems caused by preference anomalies are discussed.
Original languageEnglish
Pages (from-to)1-35
Number of pages35
JournalWorking Paper - Centre for Social and Economic Research on the Global Environment
Issue number1
Publication statusPublished - 1 Jan 2003

Keywords

  • Anomalies
  • Cost-benefit analysis
  • Surplus
  • Willingness to pay

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