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date: 26 January 2020

Abstract and Keywords

This is an overview of the methods used to evaluate projects or policies when a normative approach is taken based on individual preferences. The evaluation of individual welfare change is first outlined and related to the concepts of willingness-to-pay and willingness-to-accept. The use of individual welfare measures in project evaluation is outlined. This is followed by approaches to aggregating individual welfare changes. The case for ignoring equity considerations based on the compensation criterion is critically discussed. The use of a social welfare function for cost-benefit analysis is presented, and it application to project evaluation outlined. Several extensions are considered, including the evaluation of non-marketed commodities, the treatment of uncertainty, and multi-period project evaluation. Throughout, the conceptual difficulties of measuring and aggregating welfare change are emphasized.

Keywords: cost-benefit analysis, willingness-to-pay, willingness-to-accept, social welfare, measurement

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