WELLBYs, cost-benefit analyses and the Easterlin Discount

Abstract

The current practise of cost-benefit analysis in Western countries consists of a collection of various incompatible ideas and methodologies to obtain replicable numbers for the costs and benefits of major public spending plans. This paper describes the main elements of the dominant methodology, which combines consumer and producer surplus, price-taking, government-inputs-as-outputs, hedonic pricing of externalities, and the issue-specific use of partial or general equilibrium thinking. The paper then discusses how that methodology can be augmented and partially replaced by looking at how prospective policies would change the total number of WELLBYs (life satisfaction-adjusted years of life) of the population. The ability of the WELLBY methodology to address complex externalities is illustrated by the Easterlin Discount, which is a proposed reduction factor of 75% on all estimates of private consumption benefits to offset the envy caused in others.