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Coping with Preference Anomalies in Cost–Benefit Analysis: A Market-Simulation Approach

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Abstract

This paper proposes a methodological strategy for cost–benefit analysis (CBA) which does not require the assumption that individuals’ preferences satisfy standard coherence conditions, and so renders CBA immune to the problems generated by preference anomalies. The proposal treats CBA as an exercise in market simulation, based on the measurement of surplus. Anomalies occur when surplus measurements vary according to the hypothetical payment mechanism used. In such cases, the mechanism that is the “closest market analogue” should be used. This approach is used to resolve problems associated with some familiar anomalies, including inconsistencies between “citizen” and “consumer” valuations, and endowment effects.

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Authors and Affiliations

  1. School of Economics, University of East Anglia, Norwich, NR4 7TJ, UK

    Robert Sugden

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  1. Robert Sugden
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Correspondence to Robert Sugden.

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JEL classifications: D61, D63, Q51

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Sugden, R. Coping with Preference Anomalies in Cost–Benefit Analysis: A Market-Simulation Approach. Environ Resource Econ 32, 129–160 (2005). https://doi.org/10.1007/s10640-005-6031-5

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  • DOI: https://doi.org/10.1007/s10640-005-6031-5

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