How do positional concerns create biases in cost-benefit analysis? The Cost Benefit analysis illustrates that the right action, from a set of alternatives, is the action whose benefits exceed its costs. It is important to understand that the relative economic position is important for people’s subjective and objective well being, and that absolute economic position is less significant than it is ordinarily thought. It is necessary to establish that willingness-to-pay numbers undervalue safety and other benefits if they ignore concerns about relative position.
For many governing benefits, positional incinerations are less important than they are for income and there is wide collection of evidence in order to establish this point. Of course each piece of evidence is vulnerable to counterarguments. Evidence strongly suggests that traditional methods of estimating willingness to pay seriously understate the social value of many regulatory benefits. A great example of this is illustrated in the Smith and Jones scenario.
To illustrate how concerns about relative position affect willingness to pay for an facility such as workplace safety, we begin by working through a simple, formal example of an employment decision confronting two workers, Smith and Jones. We assume that each gets satisfaction from, or cares about, three things?his income, his safety on the Job, and his position on the economic ladder however no assumptions are made about why he cares about that position choice. What he two confronts is between a safe Job that pays $300/wok and a risky Job that pays $350/wok.
The value of safety to each is $100/wok, and each evaluates relative income as follows: Having more income than his neighbor provides the equivalent of $100/wok worth of additional distraction; having less income than his neighbor meaner the equivalent of a $100/ wok reduction in satisfaction; and having the same income as his neighbor meaner no change in the underlying level of satisfaction. The question is: Which Jobs will Smith and Jones choose? If we viewed each person’s decision in isolation, the normatively correct choice would be the safe Job.
Although it pays $50/wok less than the risky Job, the extra safety it provides is worth $100/wok, by assumption. So if we abstract from the issue of concern about relative income, the value of the safe Job is $400/wok (its 300 salary plus $100 worth of safety), which is $50/wok more than the $350 value of the risky Job. Once we incorporate concerns about relative income, however, the logic of the decision changes in a fundamental way. Now the attractiveness of each choice depends on the Job chosen by the other.
The bias against safety illustrated in this example stems from our assumption that well-being depends on relative income but not on relative safety. In practice, however, relative safety levels may also matter, since a given risk in the workplace is likely to seem less objectionable in environments in which other similar risks are moon. A bias against workplace safety would nonetheless result if concerns about relative income were greater, on average, than concerns about relative estate .
Such a difference would be expected on grounds that social safety comparisons are often excluded by the fact that safety levels are difficult to observe. Such a difference might also be Justified if, as seems reasonable, safety, far more than income, is by its nature a good whose value depends largely, though of course not only, on absolute value. This suggests that controlling goods are less positional than income, both because hey are less easily observed and because people care about them more or less independently of what others have or do.
For some such goods, the instinct here should be especially clear. The opportunity to spend time with an infant, for example, is valuable regardless of how many other people have that opportunity. The dilemma of the cost benefit analysis continues vastly into environmental issues. How much is the preservation of a virgin redwood forest worth? Proponents of the contingent-valuation method generate estimates by asking people how much they could be willing to pay to see the forest preserved.
Responses in such surveys are problematic for several reasons. One difficulty is that the valuations are often implausibly large. For example, if the amount someone would pay to prevent a specific stretch of coastline from being contaminated by an oil spill were applied to all coastlines worldwide, the resulting sum would typically far exceed ones total wealth. Responses in contingent-valuation surveys are also highly sensitive to how questions are phrased and to the format provided for responses.
For example would anyone in this class stop and think about how much they value their cup of coffee every morning and what it is you actually think its worth compared to what it is you are paying for it. But perhaps the most troubling feature is that respondents are often willing to pay more, by several orders of magnitude, to prevent a harmful effect than to undo a harmful effect that has already occurred. This is further illustrated as the “loss aversion”. Loss aversion meaner that the pain of losing a given amount is larger, for most of us, than the pleasure from gaining that same amount.
The point bears not only on cost-benefit analysis, but also on a wide range of governing possibilities, including nonviable terms in the labor market. If relative position is what matters to most workers, nonviable terms, if generally imposed, may turn out to be Justified even if the result of such terms is to lower workers’ salaries. Any approach to valuation that concentrates solely on absolute economic position, and neglects relative economic income position, will produce outcomes that are wrong in terms of the conventional arguments that Justify cost-benefit analysis in the first place.
