Wednesday, August 08, 2007

Oh, let's play the professor's stupid little game

Spot has mentioned before how King Banaian worships at the altar of the cost-benefit analysis. It's his hammer that turns all problems into nails. All right, professor, let's give your hammer a try. Here a statement of the cost-benefit analysis. It's from Wikipedia, not a classic public finance textbook, but it's pretty good:

Cost Benefit Analysis is an economic tool to aid social decision-making, and is typically used by governments to evaluate the desirability of a given intervention in markets. The aim is to gauge the efficiency of the intervention relative to the status quo. The costs and benefits of the impacts of an intervention are evaluated in terms of the public's willingness to pay for them (benefits) or willingness to pay to avoid them (costs). Inputs are typically measured in terms of opportunity costs - the value in their best alternative use. The guiding principle is to list all of the parties affected by an intervention, and place a monetary value of the effect it has on their welfare as it would be valued by them.

The first thing we might note, boys and girls, is that we are to put a value on the effects of the intervention or lack of one based on the stakeholders assessment of that value, NOT the assessment of a bunch of delusional fools in a radio booth at Patriot 1280. Spot is sorry to have to point out the obvious.

Let's assume (a good economist's word) two scenarios:

First, Spot is thinking of painting his dog house. He can do it now or put it off for a year or two. The benefit of doing it now is that it will immediately look spiffy, pleasing Mrs. Spot. There are probably some entirely non-economic benefits to this, but that is neither here nor there! The cost of doing it now is paying currently for the paint (Spot can't get credit at Home Depot) and investing the labor in the job while Spot could be snoozing in the sun.

On the flip side, if Spot puts the job off, he saves some money currently and protects his siesta time, against the disadvantage that the job will be a little bigger when Spot gets around to it.

Since Spot is the only stakeholder (he doesn't care what the neighbors think), he can—dare we say rationally?—evaluate the cost and return for each option.

The second scenario involves lots of stakeholders: it's the construction and maintenance of a nuclear power plant. If this baby blows, the neighbors have a lot more to worry about than a ramshackle doghouse next door! In fact, the consequences of a major nuclear accident are so great and so unknowable that we literally cannot do a—there's that word again—rational cost-benefit analysis. The costs of the Chernobyl accident over twenty years ago are still reverberating around the world in excess death and disease.

Because of the great and unknowable consequences of an accident, we don't build nuclear power plants to a pretty good level of safety; we are or should be building them as safe as we know how. The fact that none has been constructed in the US for a long time tell us, in fact, that the public demands a level of safety that nobody can meet and still make money.

So, here's the question, boys and girls: is a bridge more like a) Spot's doghouse or b) a nuclear power plant? No professor, the right answer is not "a."

There are obvious parallels between the bridge and the nuclear power plant. In both cases, the public—again, perhaps in contrast to the boys in the radio booth—is not willing to accept any prospect of a catastrophe. It isn't a matter of discussing a range of trade offs like our rational man the professor; the public expects that every damn time they cross the bridge, they will get to the other side. No exceptions. If you can't guarantee that, close the bridge. Just as we would expect a nuclear plant operator to shutter the plant if there was the teensy-est little problem.

The defect in the professor's argument is assuming that the cost of a disaster can be quantified. We'll never figure out what the total bridge collapse cost is in monetary terms, let alone in human terms. Certainly, the cost of fixing the bridge is inconsequential in comparison.

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