Use of cost-benefit analysis

Cost-benefit analysis is a prescriptive technique. It has an explicit normative basis and is performed for the purpose of informing policy makers about what they ought to do. It is based on welfare economics and requires all policy impacts to be stated in monetary terms.

Some people find the very idea of assigning a monetary value to lifesaving or to quality of life, which is an essential element of cost-benefit analysis, meaningless and ethically wrong. Human life, it is argued, is not a commodity that can be traded against other goods. It should therefore not carry a price tag. However, the purpose of assigning a monetary value to human life is not to engage in trading in the usual sense of that term. It is simply to provide a guideline with respect to the amount of resources we would like to spend on the prevention of accidents or injuries, given the fact that not all of our resources can be spent for this purpose. Some form of economic reasoning – that is some form of thinking that recognises the fact that resources are limited and can be put to very many alternative uses – is simply inevitable, given the following basic facts:

• A limited amount of resources is at our disposal for the prevention of accidents or injuries, or indeed for catering to any human need.
• Human needs and value systems are complex and multi-dimensional. While safety is certainly one of the more basic human needs, it is not the only one, and no society would ever be able to spend more than a fraction of disposable resources on the prevention of accidents or injuries.
• How much to spend on the prevention of accidents or injuries will depend, and ought to depend, on how important people think this good is, seen in relation to all other goods they would like to see produced.
• It is, in principle, possible both to provide too little safety and to provide too much of it. The objective of cost-benefit analysis is to help us find the right balance between safety and other goods.

If these basic observations are accepted as a fair description of the choices we are facing, then some kind of cost-benefit reasoning, although not necessarily formalised, is simply inevitable: We engage in this sort of thinking whether we are conscious of it our not.

The main reason for doing cost-benefit analyses of road safety measures is to help develop policies that make the most efficient use of resources, i.e. that produce the largest possible benefits for a given cost. Cost-benefit analysis seeks to identify the cheapest way of improving road safety. While one can think of arguments for choosing expensive solutions, one should never forget the fact that once resources have been committed to an expensive solution to a problem, they are no longer available for alternative, and possibly more beneficial, uses.