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Download Cost-Benefit Analysis: Theory and Practice by Ajit K. Dasgupta, D. W. Pearce PDF

By Ajit K. Dasgupta, D. W. Pearce

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U, = At . m ~ Pi. 8) )=1 which tells us that the utility from the increment of income is equal to the change in income multiplied by the marginal utility of income. SW = Ut+Uz+ ... e. that the individual's utilities can be aggregated. SW = ~ ~ At . XIj. 10) 'Now some of the X 11 are outputs and some inputs. b 11 _:_ i~! cliJ. 11) If the marginal utility of income is assumed equal for all persons, so that A1 = Az = ... SW =A [~1 P1 . M 1 - 1~/1 . c]. 1 PARETO SOCIAL WELFARE FUNCTIONS AND OPTIMALITY Chapter 1 implied that CBA enabled the decision-maker to choose outcomes which are socially 'most preferred', no complete allowance being made for differing intensities of preference between individuals.

In practice, conditions (a) and (b) are not met, nor are they ever likely to be. g. minimum levels of income, or education, or health: in place of 'social preferences' we would obtain 'planners' preferences', or a mixture of both. Leaving aside the problems encountered in situations contained in (c), a clear definition of a social optimum is called for. If preferences are aggregated it would seem impossible to take exception to a rule which declared policy x better than policy y if everyone prefers it.

Three situations are possible. (1) The beneficiaries bear all the costs, and the losers share in the net gains such that the existing distribution of income is maintained. (2) The beneficiaries bear all the costs, but the net gains are retained by them. (3) The beneficiaries do not compensate the losers. Situation (I) requires that losers be compensated and share in the net social benefits. Not only is no one worse off, but everyone is better off, and the initial distribution of income is not changed.

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