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Department of Economics

Cost-Benefit Analysis, Policy Reform, and Welfare Measurement

  • “Cost-Benefit Analysis as a Planning Procedure,” in D.A. Currie and W. Peters (eds.), Contemporary Economic Analysis, Vol. 2 (Proceedings of the Conference of the Association of University Teachers of Economics, 1978) (London: Croom-Helm, 1980), ch. 8, pp. 221–250; PDF file of scanned copy with pages in the right order (!) and discussion by Partha Dasgupta.
  • “Approximate Measures of Social Welfare and the Size of Tax Reform,” in D. Bös, M. Rose, and C. Seidl (eds.), Beiträge zur neueren Steuertheorie (Berlin: Springer-Verlag, 1984), pp. 95–115.

    Abstract:
    This paper deals with second order approximations to changes of welfare measured by social welfare functions. In the framework of piecemeal policy the impacts of tax reforms to social welfare are considered. Three different kinds of social welfare functions are employed: an arbitrary Bergsonian, a social welfare function based on money metric utility for individuals, and a money metric of social welfare. Furthermore Pareto improving reforms are discussed. If possible, the optimal direction and the optimal size of a tax reform are determined. PDF copy

  • “Project Evaluation by Potential Tax Reform,” Journal of Public Economics 30 (1986), 1–36.

    Abstract:
    Shadow prices are derived for small open economies with several production sectors experiencing constant returns to scale. Small projects affect the balance of trade, domestic prices (of non-traded goods and factors), and sector scales. Only domestic prices affect welfare, and only if there is not “domestic price equalization”. Generally, a project’s net benefits depend upon the potential tax (and tariff) reform made possible (or necessary) through the balance of trade effect. Border prices are right for traded goods, but domestic good shadow pricing requires knowing the direction of at least one reversible available tax reform, and presuming optimality with respect to available reforms. ScienceDirect link

  • “Principles for Evaluating Public Sector Projects,” in P. Hare (ed.) Surveys in Public Sector Economics (Oxford: Basil Backwell, 1988), ch. 2, pp. 15–44. PDF file of reprint

  • “Approximate Measures of the Social Welfare Benefits of Large Projects,” Stanford University, Institute of Mathematical Studies in the Social Sciences, Economics Technical Report No. 410 (1983); in S. Dahiya (ed.) Theoretical Foundations of Development Planning, Vol. V: Project Evaluation (New Delhi: Concept Pub. Co., 1991). PDF copy

  • “Money Metric Measures of Individual and Social Welfare Allowing for Environmental Externalities,” in W. Eichhorn (ed.) Models and Measurement of Welfare and Inequality (Berlin: Springer-Verlag, 1994), pp. 694–724.

    Abstract:
    Even with environmental externalities, money metric measures of individual welfare can often be constructed by methods similar to those of Vartia (1983), provided that individual’s willingness to pay functions are known. Satisfactory money metric measures of social welfare are harder, however. Following Feldstein (1974) and Rosen (1976), a “uniform” money metric measure is proposed, based on the uniform poll subsidy (or tax) to all individuals which produces the same gain (or loss) in social welfare. Finally, problems with the definition of such measures when faced with “environmental catastrophe” are discussed. PDF file of minor revision

  • “Reassessing the Diamond-Mirrlees Efficiency Theorem,” in P.J. Hammond and G.D. Myles (eds.) Incentives, Organization, and Public Economics: Papers in Honour of Sir James Mirrlees (Oxford University Press, 2000), ch. 12, pp. 193–216.

    Abstract:
    Diamond and Mirrlees (1971) provide sufficient conditions for a second-best Pareto efficient allocation with linear commodity taxation to require efficient production when a finite set of consumers have continuous single-valued demand functions. This paper considers a continuum economy allowing indivisible goods, other individual non-convexities, and some forms of non-linear pricing for consumers. Provided consumers have appropriately monotone preferences and dispersed characteristics, robust sufficient conditions ensure that a strictly Pareto superior incentive compatible allocation with efficient production results when a suitable expansion of each consumer’s budget constraint accompanies any reform which enhances production efficiency. Appropriate cost–benefit tests can identify small efficiency enhancing projects. PDF file of preprint