Equity in Cost-benefit Analysis by Using Distributional Weights

Cost-benefit analysis is normally used for evaluation of economic efficiency. Distributional weighting is a way of including income distribution effects in welfare evaluations. Weighted cost-benefit analysis (WCBA) is scarcely used, even though equity is an urgent issue. The reason may be the need for further development of the method. The object of this book is to present the method WCBA, to analyse the effect of the choice of distributional weights on project decisions and to study the relevance of the rationales for applying WCBA. The results indicate that the choice of weights has less effect on project decisions than one would expect, considering the size and progressiveness of the weights. The two rationales for distributional weighting, studied here, are individual marginal utility of income decreasing with income and individual preferences for the welfare of others (altruism). The former rationale seems to be the one most likely to hold. The issue of weighted cost-benefit analysis is of importance not only for researchers interested in equity and welfare but also for analysis and decision-makers in the public sektor.