A Better Calculus for Regulators: From Cost-Benefit Analysis to the Social Welfare Function

March 2017–Matthew D. Adler

The social welfare function (SWF) is a powerful tool that originates in theoretical welfare economics and has wide application in economic scholarship, for example in optimal tax theory and environmental economics. This paper provides a comprehensive introduction to the SWF framework. It then shows how that framework can be used as the basis for regulatory policy analysis and why it improves on cost-benefit analysis (CBA). Two types of SWFs are especially plausible: the utilitarian SWF, which sums individual well-being numbers, and the prioritarian SWF, which gives extra weight to the well-being of the worse off. Either one of these is an improvement over CBA, which uses a monetary metric to quantify well-being and is thereby distorted by the declining marginal utility of money. The paper employs a simulation model based on the U.S. population survival curve and income distribution to illustrate, in detail, how the two SWFs differ from CBA in selecting risk-regulation policies.