One of the most important parts of cost-benefit analysis is clearly defining standing, or whose costs and benefits will be estimated in the analysis. In many ways, the problem of defining standing is similar to the problem of choosing which outcomes to quantify and monetize. In theory, we could keep thinking of progressively distant outcomes that may be influenced by our policy change. We could similarly ask which people are affected by our policy change further and further downstream.
As an example, when looking at a minimum wage change in Ohio, we often focus on the impact of the policy on Ohioans. With infinite time and resources, we might be interested in modeling how an Ohio minimum wage could influence interstate commerce, but with limited resources, we might limit our standing to only those impacts on residents of Ohio.
However, defining standing is not just an issue of deciding whose impacts we have the capacity to analyze, it often requires us to make judgements about what should or should not count in a cost-benefit analysis. One question that regularly comes up is whether or not we should give standing to impacts that are perceived as immoral or wrong.
At last month’s Annual Conference of the Society for Benefit-Cost Analysis, I heard Richard Zerbe, one of SBCA’s founding members, talk about this issue.
He suggested that it was sound guidance to only give standing to activities that are legal. If we accept that our laws are a reflection of the things our society values, it makes sense to let our laws dictate what has standing. Leave the questions of right and wrong to the lawyers and lawmakers.
Of course, laws change over time, and there are countless examples of historical laws that certainly do not reflect the values of our modern society. This question became relevant to our work late last year, when we were working on our cost-benefit analysis of recreational marijuana in Ohio.
One of the benefits we calculated was the consumer surplus that people would receive from participating in the recreational marijuana market. From an ECON 101 perspective, this is a critical part of the welfare equation.
The question we were faced with was whether all of this consumer surplus was a new benefit, or if there was already some consumer surplus that people who use recreational marijuana illegally were receiving. While it seems odd to only count that benefit assuming legalization occurs, it would go against the norm for cost-benefit analysis to include the illegal consumer surplus.
In the end, we ended up not counting the consumer surplus from the illegal market in our analysis. This was more a factor of the difficulty that came with estimating exactly what that would be, given the fact that we could never fully understand the size and prices that existed in an illegal market.
I think if we were able to better estimate the illegal market for marijuana, this would have been a situation where giving standing to an illegal good would have been appropriate. Clearly, the legality of marijuana did not reflect its current social acceptance. This is evidenced by the fact that it is legal in almost half the country, and the vote passed quite convincingly in Ohio. As with every part of a cost-benefit analysis, the most important thing is to be extremely clear about what assumptions are being made.