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Behavioral Economics and Benefit Cost Analysis


This paper provides a brief review of the theory of benefit cost analysis and then discusses proposals by economists calling for developing a new foundation for applied welfare economics. These proposals assume individual choices cannot be reconciled with coherent preferences. As a result, applied welfare economics must consider a different basis for defining the public tradeoffs to be used in project evaluation. This analysis concludes none of the available proposals meets the needs for policy evaluation with benefit cost analysis. The paper also offers a different explanation for the seemingly incoherent preferences implied by some choices. The last part of the paper reports the results of laboratory experiments intended to evaluate whether market outcomes would allow analysts to discriminate among alternative hypothesis for seemingly irrational choices.

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Correspondence to V. Kerry Smith.

Additional information

V. Kerry Smith is a W. P. Carey Professor of Economics, Arizona State University, University Fellow, Resources for the Future, and Research Associate, National Bureau of Economic Research and Eric. M. Moore is a Research Assistant at Resources for the Future, respectively.

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Smith, V.K., Moore, E.M. Behavioral Economics and Benefit Cost Analysis. Environ Resource Econ 46, 217–234 (2010).

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  • Behavioral economics
  • Benefit cost analysis