The Welfare Foundations of CBA

Abstract

Given the sheer magnitude of public investment in both advanced and underdeveloped economies, the importance of proper appraisal techniques cannot be exaggerated. The aim of cost-benefit is to guide the decision-maker into channelling resources into projects which will yield the greatest gain in net benefit to society. So far, benefits and costs have been loosely defined in terms of society’s wants or preferences. The objective function of maximising net benefits can therefore be construed as a function which channels resources into their ‘most preferred’ uses, as viewed by society itself. In the economist’s language, the maximisation of net benefits should be formally equivalent to the maximisation of social utility, or social welfare. The earliest formulation of the problem in these terms was by Dupuit in his paper ‘On the Measurement of the Utility of Public Works’ in 1844.¹