Cost-Benefit Analysis and the Environment

Abstract

This review-essay explores the uses and limits of cost-benefit analysis in the context of environmental protection, focusing on three recent books: Priceless, by Frank Ackerman and Lisa Heinzerling; Cellular Phones, Public Fears, and A Culture of Precaution, by Adam Burgess; and Catastrophe: Risk and Response, by Richard A. Posner. The review-essay emphasizes three principal limitations on the use of cost-benefit analysis. First, it is important to distinguish between the easy cases for cost-benefit analysis, in which the beneficiaries of regulation pay all or almost all of its cost, from the harder cases, in which the beneficiaries pay little for the environmental protection that they receive. In the harder cases, net welfare gains and distributional advantages are possible even if environmental regulation fails cost-benefit analysis. Second, there are possible uses, in the environmental context, of maximin rather than cost-benefit analysis, especially when regulators are attempting to control catastrophic risks where probabilities cannot be assigned. An Anti-Catastrophe Principle makes sense for such situations. Third, human beings are citizens, not merely consumers, and this point requires abandonment of the willingness to pay criterion in some contexts.