Implementing Cost-Benefit Analysis When Preferences Are Distorted.

Cost-benefit analysis is routinely used by government agencies in order to evaluate projects, but it remains controversial among academics. This paper argues that cost-benefit analysis is best understood as a welfarist decision procedure and that use of cost-benefit analysis is more likely to maximize overall well-being than is use of alternative decision procedures. The paper focuses on the problem of distorted preferences. A person's preferences are distorted when his or her satisfaction does not enhance that person's well-being. Preferences typically thought to be distorted in this sense include disinterested preferences, uninformed preferences, adaptive preferences, and objectively bad preferences; further, preferences may be a poor guide to maximizing aggregate well-being when wealth is unequally distributed. The paper describes conditions under which agencies should correct for distorted preferences, for example, by constructing informed or nonadaptive preferences, discounting objectively bad preferences, and treating people differentially on the basis of wealth. Copyright 2000 by the University of Chicago.