A COMMENT ON THE CONFERENCE

ON COST-BENEFIT ANALYSIS
GARY S. BECKER*

Abstract
This comment discusses the importance of politics in understanding cost-benefit
analysis. Economists frequently rely on a social planner model, under which cost-
benefit analysis has a straightforward role, but a better model is the interest group
competition model. In this model, cost-benefit analysis can be used to explain why
some regulations are adopted and others are not. Further, cost-benefit analysis may
also be useful for undermining misleading claims of self-interested political pres-
sure groups.

E ver since the workshop by Eric Posner and Matthew Adler last spring,
I have become convinced that an understanding of government behavior is
1

essential for motivating a useful cost-benefit analysis of government pro-

grams. Although the relevance of cost-benefit depends crucially on the po-
litical process, political issues have been almost entirely neglected in the
conference papers and most of the discussion. To concentrate on these is-
sues, I sidestep interesting questions raised at the conference, such as which
goods and activities can be included in utility, or whether discounting of
future utilities is rational.
I evaluate cost-benefit analysis from the perspective of two polar inter-
pretations of political behavior. The first is the social planner model; the
second is the interest group competition model.

The Social Planner Model

An all-powerful social planner lies behind many discussions by econo-
mists of political choices. This planner chooses regulations, taxes, and sub-
sidies that maximize perhaps a highly nonlinear function of individual utili-

* University of Chicago. This is a reaction to the conference presented informally. I ap-

preciate the comments of Casey Mulligan and Eric Posner on the written version.
1
See Matthew D. Adler & Eric A. Posner, Rethinking Cost-Benefit Analysis, 109 Yale
L. J. 165 (1999).
[ Journal of Legal Studies, vol. XXIX ( June 2000)]
 2000 by The University of Chicago. All rights reserved. 0047-2530/2000/2902-0022$01.50
1149

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1150 THE JOURNAL OF LEGAL STUDIES

ties. If the planner can redistribute income with lump-sum taxes and
subsidies, then the cost-benefit criteria for evaluating any project or pro-
gram become very simple and powerful. Total benefits equal the sum of
dollar benefits to different individuals, and total costs equal the sum of dol-
lar costs. A program should be undertaken if aggregate benefits exceed ag-
gregate costs, regardless of the program’s size or its effects on the poor and
rich.
If benefits exceed costs, everyone would be made better off by the pro-
gram, regardless of its initial incidence. For the planner would redistribute
away from any adverse initial incidence, until everyone is made better off
(assuming all individual utilities are normal goods in the social welfare
function).
The assumption of lump-sum redistributions simplifies the analysis, but
it is obviously not realistic. A better approach recognizes that all redistribu-
tions affect incentives and in this way produce deadweight costs (DWCs).
With DWCs, the appropriate calculation of benefits and costs becomes
more complicated, although it is still clear in principle. Instead of simply
adding all benefits and costs, they should be weighted by the inverse of the
marginal DWCs of redistributing to or away from each individual.
Moreover, since DWCs tend to rise as redistribution increases, these
weights would not be constant, but would be different for large and small
programs. However, the locally relevant weights in principle could be
backed out by estimating the DWCs of the taxes, subsidies, or regulations
that affect incomes. Note that it is still not necessary to know much about
the content of the social welfare function. The assumption that a planner is
maximizing a stable welfare function of individual utilities is sufficient to
allow a backing out of the weights attached to different utilities in the vicin-
ity of the planner’s equilibrium position.
In the social planner model, cost-benefit analysis remains relevant even
with the more realistic assumption of DWCs. Moreover, the principle is
easy to implement, although in practice it would often be difficult to esti-
mate the relevant weights applied to the gains and losses of different indi-
viduals.2
Still, even with DWCs, the social planner approach is a fairy tale and
is not relevant to understanding which regulations, taxes, and subsidies get
implemented. A better model of the political process is required to judge
the value of cost-benefit analysis.

2
See, for example, Arnold C. Harberger, Basic Needs versus Distributional Weights in
Social Cost-Benefit Analysis, 32 Econ. Dev. Cultural Change 455 (1984).

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 CONFERENCE COMMENT 1151

The Interest Group Competition Model

A good start is the interest group competition model promoted in the past
couple of decades by many political scientists, and also by economists, such
as George Stigler, Sam Peltzman, Casey Mulligan, myself, and others.
In this approach, the political power of different groups determines which
regulations, taxes, and subsidies are adopted. Since redistributions of in-
come induced by powerful interest groups are not likely to be socially ‘‘op-
timal’’ in the sense used in the social planner model, cost-benefit analysis
may seem to be irrelevant. But an analysis that weights equally benefits and
costs to all individuals is still useful in explaining actual political programs.
The programs implemented by the political process obviously depend on
the political power of different groups, such as farmers, steelworkers, auto-
mobile companies, and others. Cost-benefit analysis does not tell us much
about many determinants of political power. However, the magnitude of the
benefits from a program to a political group determines the maximum
amount that this group would be willing to spend on campaign contribu-
tions, on advertising, and in other ways in order to have that program
adopted. Similarly, the cost of a program to any group determines the maxi-
mum amount that group would spend to prevent the program from being
implemented.
Therefore, the larger the difference between the benefits and costs of a
program, the greater tend to be political expenditures by supporters com-
pared to political spending by opponents. That is, even when all interest
groups are completely selfish, regulations, taxes, and subsidies are more
likely to be adopted when they produce larger benefits compared to costs.3
Put differently, programs with relatively small DWCs are more likely to
be adopted than those with relatively large DWCs. Political power held
constant, programs with benefits that exceed costs—those with negative
DWCs—have the best chances of being implemented. Similarly, policies
tend to be abandoned when their DWCs grow sharply over time. Peltzman
bases his explanation of the deregulation movement in the 1970s and early
1980s on the growth over time in DWCs from airline, financial, telecommu-
nication, and other regulations.4
So benefits and costs remain an important factor in determining actual
regulations, taxes, and subsidies even in models of competition among

3
Gary Becker, Public Policies, Pressure Groups, and Dead Weight Costs, 28 J. Pub. Econ.
329 (1985).
4
Sam Peltzman, The Economic Theory of Regulation after a Decade of Deregulation, in
The Political Economy of Privatization and Deregulation (Elizabeth E. Bailey & Janet
Rothenberg Pack eds. 1995).

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1152 THE JOURNAL OF LEGAL STUDIES

selfish interest groups. To be sure, no cost-benefit criterion is necessary or

sufficient for the political implementation of policy. But the difference be-
tween aggregate benefits and costs helps explain which policies are
adopted. Moreover, thousands of potential policies never muster sufficient
political support because they have large costs relative to benefits. Cost-
benefit analysis, then, is a useful tool for the political economist who wishes
to explain why some policies are adopted and others are not.
Calculations of the benefits and costs produced by different programs
sometimes also influence which programs are rejected or accepted. Very
small interest groups, such as sugar growers, may be successful because
voters have little incentive to become informed about the effects of compli-
cated policies. Effective groups are able to persuade enough voters to sup-
port policies that favor these groups, even when they badly hurt many
others.
Cost-benefit analysts may be in a battle against misleading information
spread by self-interested political pressure groups. Still, these analysts can
influence political outcomes by making enough voters aware of the true ef-
fects of different policies. For this information sometimes raises the opposi-
tion by voters to programs with large DWCs. For example, I believe the
timing of the deregulation movement mentioned earlier was affected by the
economists and lawyers who showed how much harm resulted from the reg-
ulation of airlines, banking, trucking, securities, and telecommunications.

Conclusion
Cost-benefit analysis has a strong and clear place in a social planner
model of political choices. But that model is of little value in explaining
actual regulations, taxes, and subsidies. Yet, even when political decisions
result from competition among interest groups, benefits and costs help ex-
plain which policies are adopted. Moreover, information about the true ben-
efits and costs of different programs sometimes determines whether policies
muster enough political support.

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