Friday, November 9, 2012
Hopkins (Sheraton Baltimore City Center Hotel)
*Names in bold indicate Presenter
This paper makes two arguments: first to drop the potential compensation test; second to provide a decision rule perspective, rather than a project perspective, for a Pareto justification for the use of benefit-cost analysis. The first argument follows in part from the second. The empirical results show that the use of benefit-cost analysis has justification directly from the Pareto criterion so that the use of the potential compensation test is unnecessary. Together these two arguments suggest a simple rule for project adoption that is similar to, but subtly different from, the potential compensation rule. The rule is simply to adopt all projects with a positive net present value, considering in principle all economic goods. The rationale for such a rule is that it has a better chance than other decision rules of actually improving welfare and that it is more likely to result in Pareto improvements or near Pareto improvements.