Benefit-cost analysis using data envelopment analysis

Abstract

Benefit-cost analysis is required by law and regulation throughout the federal government. Robert Dorfman (1996) declares "Three prominent shortcomings of benefit-cost analysis as currently practiced are (1) it does not identify the population segments that the proposed measure benefits or harms (2) it attempts to reduce all comparisons to a single dimension, generally dollars and cents and (3) it conceals the degree of inaccuracy or uncertainty in its estimates." The paper develops an approach for conducting benefit-cost analysis derived from data envelopment analysis (DEA) that overcomes each of Dorfman's objections. The models and methodology proposed give decision makers a tool for evaluating alternative policies and projects where there are multiple constituencies who may have conflicting perspectives. This method incorporates multiple incommensurate attributes while allowing for measures of uncertainty. An application is used to illustrate the method.

Decision-Making Methodology for Risk Management Applied to Imja Lake in Nepal

“…The data envelopment analysis (DEA) methodology was first developed for use in efficiency analysis for operations research [54] and has since been applied to benefit-cost analysis [55,56] to assign prices to non-market (intangible) goods in environmental cost benefit analyses. This methodology identifies the most efficient project, from an economic standpoint, if all projects competed in a perfect market.…”

“…This methodology identifies the most efficient project, from an economic standpoint, if all projects competed in a perfect market. The DEA formulation of Womer et al [56], was used here. DEA allows comparison of consequences that do not have market values or that have unknown prices (such as fatalities) and the inclusion of conflicting perspectives on what is a cost or benefit [56].…”

“…The DEA formulation of Womer et al [56], was used here. DEA allows comparison of consequences that do not have market values or that have unknown prices (such as fatalities) and the inclusion of conflicting perspectives on what is a cost or benefit [56]. DEA does so by reversing the question posed in a traditional benefit-cost analysis and asking what values of costs and benefits (prices) are required to make a given project economically efficient [55].…”

Ex-Post Clustering of Brazilian Beef Cattle Farms Using Soms and Cross-Evaluation Dea Models

“…Therefore, the "bulls -cull cows" ratio makes sense when using DEA to analyze cost-benefit ratios, and not just pure productive relations. This interpretation of DEA was introduced in [30] and was used in [31,32]. Generalizations of this usage can be seen in [33].…”

Some Remarks About Negative Efficiencies in DEA Models

“…Therefore, the "bulls -cull cows" ratio makes sense when using DEA to analyze cost-benefit ratios, and not just pure productive relations. This interpretation of DEA was introduced by Womer et al (2006) and was used by Kuosmanen & Kortelainen (2007), Kuosmanen et al (2009). Generalizations of this usage can be seen in Bougnol et al (2010).…”