Tuesday, 29 January 2013

HS2 and cost-benefit analysis

The UK government has recently announced the route for the second leg of the long awaited high speed rail link between London and the north of England. This prompted the usual appeals to cost-benefit analysis to argue one way or the other. Most ‘experts’ seemed to be arguing that the supposed benefits are largely illusory and so the link does not make economic sense. But what does that really mean?
   Cost-benefit analysis is one of the most basic tools in the economist’s armoury. It’s pretty clear, however, that the general public don’t like it. Many people I heard on the radio talking about the rail link were annoyed by the experts cost-benefit calculations. Similarly, when health economists argue that a particular cancer drug should not be made available on the National Health Service because the costs exceed the benefits, people aren’t too pleased. So, what’s wrong with cost-benefit analysis?
    Given that I’m an economist it will be no surprise to hear that I don’t think anything is wrong with cost-benefit analysis. It’s one of the most basic principles of economics for a good reason –something is worth doing if and only the benefit exceeds the cost. What I have much less sympathy for is the way economists often use cost-benefit analysis.
   Doing a proper cost-benefit analysis is difficult because measuring potential benefits and costs can be a very tricky thing indeed. I’m excited by a high speed rail link because I want to see technological progress and development; how can you measure this benefit? Similarly, a cancer drug might add two years to a person’s life; how can you measure the benefit of that? I know there are ways we can attempt to measure these things, such as, willingness to pay and quality adjusted life years, but I also know how imperfect these measures are!
   So, my two concerns with the way economists often do cost-benefit analysis are as follows: (i) They make life easy for themselves by counting the simple to measure financial costs and benefits while ignoring the more difficult to measure costs and benefits; this often biases against the benefits. (ii) They underplay the huge margin for error in the calculation of costs and benefits; this leads to a sense of decisiveness that is not justified.
   It’s important, therefore, to appreciate the limitations of cost-benefit analysis. It is a useful tool but it cannot be expected to give clear cut answers. On tricky issues it is best used as a tool to inform and open debate rather than as a means to decide. Decisions should come down to questions of individual or democratic judgement. I, for one, would vote for the high speed rail link. Maybe you disagree. Just don't think cost-benefit analysis holds all the answers.   

1 comment:

  1. The break up: a cost-benefit analysis http://www.mcsweeneys.net/articles/its-not-you-its-quantitative-cost-benefit-analysis