Apr 29, 2011

Cost‐benefit analysis - a theoretical framework for cocaine liberalization

Sen, Amartya Kumar. 2000. The discipline of cost‐benefit analysis. Journal of Legal Studies 29(S2): 931-952. Here
The discipline of cost-benefit analysis—if discipline it is—has fearless champions as well as resolute detractors. It is, partly, a battle of giants, for there are heavyweight intellectuals on both sides, wielding powerful weapons of impressively diverse kinds. 
At the risk of oversimplification, explicit valuation is a part of the insistence on a rationalist approach, which demands full explication of the reasons for taking a decision, rather than relying on an unreasoned conviction or on an implicitly derived conclusion. 
With these ideas Sen starts his 2000 article. After reading it article one is more aware of the complexities of doing Cost-Benefit analysis [it is not an easy task at all, it is actually a monumental challenge]. If one considers for example a cost-benefit analysis to legalize (decriminalize) cocaine in the US and Latin America [lo que es urgente considerando la gran cantidad de gente que esta muriendo debido al trafico de drogas], one can look at the effects of doing this versus the morality of doing it [this argument is not new], what I found new is (1) the need to consider the presence of concavities (or non-linearity) regarding the relationship between the different costs and benefits, (2) the importance of considering the effects on individual freedom due to changes in policies, (3) the effect on values, cultural values, and (4) the difficulty (and the need) to estimate and justify the probabilities to calculate expected values. By the way, a majority of economists support the idea of drug liberalization.

The article is relatively [highly] abstract, it is not an easy read, but it helps if one reads it with a problem in mind. I read it thinking about a cost-benefit analysis of the legalization of drugs in the USA and Latin America. But one can consider also mining activity, health reform, etc.

The complete abstract is:
Cost‐benefit analysis is a general discipline, based on the use of some foundational principles, which are not altogether controversial, but have nevertheless considered plausibility. Divisiveness increases as various additional requirements are imposed. There is a trade‐off here between easier usability (through locked‐up formulae) and more general acceptability (through allowing parametric variations). The paper examines and scrutinizes the merits and demerits of these additional requirements. The particular variant of cost‐benefit approach that is most commonly used now is, in fact, extraordinarily limited, because of its insistence on doing the valuation entirely through an analogy with the market mechanism. This admits only a narrow class of values, and demands that individuals be unconcerned about many substantial variations, ignored in the procedure of market valuation. The use, instead, of a general social choice approach can allow greater freedom of valuation and can also accommodate more informational inputs.

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