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Human
Well-Being and Economic Goals
PART
IV
Applied Welfare Economics:
Externalities, Valuation, and Cost-Benefit Analysis
Overview Essay Page 1
Frank Ackerman
[A]
study of welfare which confines itself to the measurement
of quantities of goods and their distribution is
not only seriously limited, it is -- at least in
those countries where the mass of people have advanced
far beyond subsistence standards -- positively misleading.
For the things on which happiness ultimately depends,
friendship, faith, the perception of beauty, and
so on, are outside its range; only the most obstinate
pursuit of formalism would attempt to bring them
into relation with the measuring rod of money, and
then to no practical effect. Thus, the triumphant
achievements of modern technology,... the single-minded
pursuit of advancement, the craving for material
success, may be exacting a fearful toll in terms
of human happiness. But the formal elegance of welfare
economics will never reveal it.
-- E.J. Mishan[1]
A definitive
review of welfare economics in 1960 ended with an
eloquent warning (quoted above) against the attempt
to measure and monetize everything that people value.
Since that time, however, many have rushed in where
Mishan feared to tread. As seen in the previous
section, the theory of welfare economics has experienced
a protracted crisis and discovered inescapable limitations
to its analytical power. Meanwhile, applied welfare
economics, in the form of valuation of externalities
and incorporation of those values into cost-benefit
analyses, has become a rapidly growing field. Useful
quantitative tools have been developed -- and have
been applied far beyond the range of problems for
which they are appropriate. As a result, a new round
of critiques addresses the theoretical errors and
overstatements implicit in the current practice
of valuation and cost-benefit analysis.
This section
addresses three closely related topics that arise
as welfare economics turns from theory to practice:
first, the theory of externalities and policies
designed to internalize them; second, the debates
over valuation of environmental and other externalities,
particularly concerning the survey methodology known
as "contingent valuation"; and finally,
the merits of cost-benefit analysis as a tool for
reaching public policy decisions.
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