Cost-Benefit Analysis

Origin. Dupuit (1848); formalized in US federal practice from the 1936 Flood Control Act.

Mechanism. Converts all consequences to a common monetary unit, discounts to present value, and compares. Commensurability is both the method's power and its entire vulnerability.

Procedure. Enumerate costs and benefits over the horizon, to all parties. Monetize. Select a discount rate and justify it. Compute NPV. Perform sensitivity analysis on the discount rate and on every monetized non-market good.

Applies to. Comparable alternatives with predominantly market-valued consequences.

Limitations. The discount rate governs the result for any long-horizon question, and its selection is an ethical judgment about future persons wearing the costume of a technical parameter. Non-market goods are monetized by methods (contingent valuation, revealed preference) whose error bars exceed the differences the analysis is meant to detect. Distribution is invisible to the sum.