Cost-benefit analysis can be an effective tool to analyze simple, one-dimensional problems, such as whether to install dividers on dangerous stretches of highway, where relatively unambiguous data is in abundant supply and there is little controversy. It also is a good way to elucidate the trade-offs for a given policy or regulation, or to produce a summary statistic about its economic efficiency.
But the cost-benefit method loses its authority when it’s used to assess more complex decisions. It is inadequate for evaluations of interventions that will affect many different dimensions, such as markets, economies, health, the environment, and endangered species. Cost-benefit analysis is also inappropriate for products or processes over which there are disagreements about benefits or about which outcomes are important. And it should never be used as the basis for regulation in the presence of scientific uncertainty or value conflicts, or in an area where there are no authorities one can trust to know all the answers. Decisions like these require a more expansive methodology — one that isn’t dependent on the affectation of translating all value into economic terms, that is more transparent and responsive to outside criticism, and that pragmatically represents the interests of everyone involved: industry, government, and the public.
Author: Denise Caruso
Source: “strategy+business”
Subjects: Decision Making, Risk Management, Trends / Analysis
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