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A Place for Cost-Benefit Analysis*David SchmidtzWhat next? We are forever making decisions. Typically, whenunsure, we try to identify, then compare, our options. We weighpros and cons. Occasionally, we make the weighing explicit, list-ing pros and cons and assigning numerical weights. What couldbe wrong with that? In fact, things sometimes go terribly wrong.This paper considers what cost-benefit analysis can do, and alsowhat it cannot.1. What Is CBA, and What Is It For?
benefits for the Ontario community, beyond these direct costs,are not factored into the cost comparisons.” Why not? Because“even if desirable, these costs are difficult to estimate in mon-etary terms given the diffuse nature of the impacts and wide va-riety of effects.” The costs that Ontario Hydro proposed to takeinto account “include the social and environmental costs incurredby Hydro but do not include social and environmental costs ex-ternal to Hydro. This reflects normal business practice. In Hy-dro’s judgment, including additional costs and benefits on anequitable basis would be impracticable.”1It is amazing that people would defend such a patently uneth-ical stance by describing it as “normal business practice.” Sadly,though, appealing to “normal business practice” is itself normalbusiness practice, and Ontario Hydro is not especially guilty inthat regard. Indeed, it is notable that Ontario Hydro was notduplicitous, since it did, after all, express its policy bluntly andpublicly. Those who wrote the report evidently had no idea thatwhat they were saying was wrong.Environmentalists have their own “normal business practices,”though, and it is too easy to condemn organizations like OntarioHydro without thinking things through. Many critics of cost-benefit analysishenceforth CBAseem driven by a gut feelingthat CBA is heartless. They think that, in denouncing CBA, theyare taking a stand against heartlessness. This is unfortunate. Thefact is, weighing a proposal’s costs and benefits does not makeyou a bad person. What makes you a bad person isignoringcosts—the costs you impose on others.The problem with Ontario Hydro arose, not when Ontario Hy-dro took costs and benefits into account, but rather when it de-cidednotto do so. The problem in general terms is a problem ofexternalcosts. External costs are costs that decision makers ig-