The Consent Justification for Benefit-Cost Analysis

This paper provides a Consent Justification for benefit-cost analysis (BCA). The Consent Justification is based on a tendency toward actual compensation. A substantial justification for using BCA as a tool is the actual Pareto test, called the Consent Justification, in combination with the net present value criterion for individual projects. The traditional justification, the potential compensation test (PCT), is unsatisfactory on several grounds. In addition, the PCT occupies the uneasy position of being the source of extended criticisms in the economic literature and especially in the legal and philosophy literature. The argument for the Consent Justification lies not only in the deficiencies of the PCT, but also, especially, in a showing through simulation that all tend to gain across a portfolio of projects which is not large but rather robust with respect to errors and assumptions.