We value efficiency in our society because it helps us to get the most for our money. In many matters we rely on free market competition to foster such efficiency, but there are some things that the free market can’t secure for us, such as national defense, an educated workforce, and clean air. The free market breaks down in such cases because these are public goods, goods that are available to a large number of people whenever they’re available to anyone.
If I’m protected by our national defense, so is everyone else. If one employer benefits from a literate American workforce, so do others. If the air is clean for me, it’s clean for you. In this situation, if you try to minimize your costs and maximize your gains, you would want someone else, or everyone else, to provide the public good so that you could benefit from it free of charge. But if everyone does this, the good won’t be produced at all, which would be bad for all of us.
This is where governments legitimately enter the picture. They tax people to support the military and public education; they require children to attend school or become educated at home; and they require businesses and consumers to reduce the pollutants they add to the air. But how does a government know how much to tax, how far education should go, or how clean the air should be? This is where cost-benefit analysis (CBA) is useful.
CBA guides government decision-makers to mimic the efficiency-creating decisions of the free market by considering the dollar value of all inputs and outputs. Consider air pollution from combustion-engine cars. Since the 1970s cars have been required to have catalytic converters in their exhaust systems to reduce health-impairing air pollution. Pollution reduction costs money that most people would prefer not to spend because they have to share the improved air quality with everyone else. Most people would prefer that others incur the costs of pollution control.
But how much should the government require us to spend to clean up the air? CBA suggest calculations like those in free enterprise, except the goal is to maximize wealth in the country, not just in a particular business. Greater air purity requires more money than lesser purity. To maximize the country’s wealth, CBA recommends that purity mandates cost society no more than the savings they generate. Savings associated with cleaner air include reduced losses due to medical expenses, lost work days, and premature deaths, and potential gains in the private-sector include more revenue for the tourism and sports industries.
If reducing the pollution generated from car exhausts by 99% costs much more in dollar terms than the benefits of cleaner air, it’s not worth the expense. On the other hand, if reducing the pollution by only 20% leaves the air so dirty that the losses from air pollution remain greater than the cost of such weak pollution control, the country is losing money. The right amount of pollution control is the amount generated by costs that are close to, but no greater than, the increased monetary worth to the country that stems from having cleaner air.
I don’t see any way around including such calculations in determinations of public policy regarding public goods. However, a problem arises when CBA is the only tool used to make such policies. The problem is that poor people tend to be shortchanged when CBA is used without any other considerations guiding policy.
Our country spends a lot of money to protect property from floods. Imagine the government deciding between protecting two different low-lying areas of 1,000 acres. In one area there are 500 large homes on 2-acre lots. In the other there are 5,000 small homes, many of them in trailer parks. Suppose the dollar value of the 500 large homes is much greater than the total worth of the smaller homes. CBA would recommend protecting the rich rather than the poor. Thousands of poor people could “properly” be left unprotected from floods.
The underlying problem is that CBA counts each dollar as equal to every other dollar, whereas governments should count each person equal to every other person. When dollars rather than people are equal, decisions will favor people with more dollars.
Few voters realize that our government’s greater responsiveness to the rich over the poor need not be the result of bribes or other illegitimate means. CBA incorporates preference for the rich as a legitimate government decision-making procedure.
This doesn’t mean that we should stop using CBA. It means that we should augment the procedure and modify its dictates with the common sense awareness that money isn’t everything. Equity counts, too. Our government should consider all people equal, even when that means losing some money.
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