How Equity Might Be Considered

There have been several suggestions recently as to how equity considerations might be incorporated into cost-benefit analysis. Some of these suggestions such as that of Foster (1966) are applied within the framework of a single analysis whereas others such as that of McGuire & Garn (1969) are applied when cost-benefit analysis is being used to select projects from a large number of feasible projects when there is a limited budget.

Internal consideration of equity

The consideration of equity within a single cost-benefit analysis can be handled in several ways. The analysis can be conducted as normal but extra constraints can be added, such as, the project is rejected if the benefits to a pre-defined group are smaller than some desired amount, or are smaller than those of another group. Another method would be to proceed as normal but detail how costs and benefits are borne by different sections of the community, and leave the decision as to whether it is acceptable to the decision maker[1] .

Before making his own suggestion Foster lists 3 ways in which income distribution can be incorporated in cost-benefit analysis, put forward by Marglin (in Maas et. al. (1962)). These are (i) modify costs and benefits by weighting (workable if specific groups can be identified and if weights can be agreed upon). (ii) maximise net benefits of a favoured group (difficulties will arise if continued indefinitely without counting the cost of doing so). (iii) maximise the 'Pigovian' function subject to an income constraint. It is the first of these which Foster proposes in his "Democratic Strength of Preference Social Welfare Function".

Foster's function is one in which all costs and benefits are considered and their monetary values are weighted by the average income of the groups on which they fall. His aim is not to transfer cost-benefit analysis from economics to politics but to show (i) an affinity between the two types of decision process (ii) that political decisions can be made by using a decision function in a cost-benefit analysis framework and (iii) that there may be some 'social' costs and benefits which are more in line with this rather than the 'Pigovian' function.

There are four main problems which Foster lists; (i) to whom should costs and benefits be applied; the head of the family? if so how can different family sizes be coped with? and what mean income should be used as it varies over time and area? (ii) There are problems of reduced efficiency inherent in this function. "This is no more than to say that this decision function would have a redistributive effect" (Foster 1966) (iii) There are problems of expanding and compressing income elasticities - does it have the desired result? (iv) What income level should be used?

To these problems should be added a fifth. The function will give different results dependent upon how the population is divided into groups. It will tend to vary between a limiting value and the value produced by the 'Pigovian' function as the spread of the distribution of income within each group varies from the very narrow to that of the whole population.

External consideration of equity

The recommendations of McGuire and Garn were developed "..... for consolidation of equity and efficiency criteria in the selection of regional development projects in the United States" (McGuire & Garn 1969, p882'). They list four important factors with which the federal decision maker is faced (i) More projects than resources available (ii) A wide variation in expected benefits (iii) A wide variation in need (iv) Projects from poor areas will usually have a lower benefit-cost ratio. In the light of these problems they list five decision functions which have been suggested. They are similar to those for dealing with single projects.

Ignore questions of need and exhaust the budget on the most efficient projects.
Ignore efficiency and give the grant to those who need it.
Establish a minimum efficiency and select according to need; look at the outcome and re-evaluate the constraints.[2]
Establish a minimum level of need and select according to efficiency, look at the outcome and re-evaluate the constraints.
Develop an explicit preference function between need and efficiency. (McGuire & Garn 1969, p888').

It is the last of these five which they develop into a decision formula which incorporates both equity and efficiency. It gives the decision makers a guide as to the selection of projects from a large number which for a given level of overall efficiency will be most equitable. However this method of applying an external preference function would be difficult to apply in the context of a transport plan for a single area. In the function developed for the selection of regional development projects equity is incorporated by making the results from areas of greatest need more attractive. Cost-benefit analysis of transport plans, in which the costs and benefits for each plan under consideration fall upon people from the same area, is not amenable to this treatment. To apply an external weighting to the results from each analysis, the costs and benefits must fall upon different and identified populations.

Conclusion

Both of these methods, one applying an internal weighting and the other an external weighting, still do not cope with a fundamental problem. That is no uni-dimensional function, such as net benefit, weighted net benefit, or benefit-cost ratio, can adequately represent a distribution of costs and benefits, which is essentially a multi-dimensional function.

[1] These two methods are suggested by Prest & Turvey (1965).

[2] Proposed by Marglin (1967) as an Iterative procedure for balancing equity and efficiency in long range planning.

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