Monday, December 17, 2007


The ongoing theme for some of my recent posts has been tools used by economists in studying the environment. In this post I am going to discuss the concept of efficiency and methods of cost benefit analysis.

Pareto Efficiency: A state is pareto efficient if it is impossible to make someone better off without harming another. In other words, if you can only make someone better off by making someone else worse off, you should do nothing. This state of rest is ‘pareto efficient.’

Cost Benefit Analysis: Cost benefit analysis is based largely on ‘pareto –potential' efficiency. In this case the benefits of a policy must exceed the costs imposed on society to achieve those benefits. It is pareto-potential because, if the benefits generated by a policy exceed the costs, beneficiaries could theoretically or potentially compensate others who may be harmed by the policy.

In the next post, I will discuss how costs and benefits are measured, an important exercise for public policy analysis.

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