Question

From Theory and Practice in Policy Analysis, Chapter 3 write a 250 words essay on what is the Kaldor-Hicks criterion and what are some ethical issues with it? What are some of the practical/political issues with the way that BCA is applied? What do you think about the Precautionary Principle as an alternative to BCA? In the end, is BCA a useful tool?

Answer 1

Kaldor-Hicks criterion is one of the criteria used for welfare. It was formulated by Hicks, Scitovsky and Kaldor and is based on the Pareto’s ordinal utility measurement. This criterion has the following assumptions:

• An individual is the best judge for his welfare as his satisfactions are independent from any kind of bias or dependency
• There is no external effect in the rate of production as well as consumption
• The preferences and choice of an individual remain constant throughout
• Utility can be measured ordinarily and it is considered impossible to do interpersonal comparisons

The ethical issues involved on this criterion are:

• The income distribution of individuals is blankly ignored
• There is no common standard of value between 2 comparisons
• The actual compensation value is not taken into consideration
• Universal validity is absent in this criterion

BCA or cost benefit analysis is the mechanism, which is used to assess the strengths and weaknesses of alternatives of a transaction or investment. Through this mechanism, the desirability of a project can be estimated based on the net benefits that it provides.

The practical issues involved with this approach are:

• BCA becomes ineffective for large projects
• If indirect costs outweigh the direct costs involved in a project, BCA approach would not be useful

Alternative approaches to BCA:

• Net present value method
• Internal rate o return method

Benefits of using BCA:

• This approach can be used for both new as well as old projects
• This analysis can be based on accepted social principle, so is quite flexible
• Evaluation of social benefits can be facilitated using this method