December 19, 2010

On Non-Marginal Cost-Benefit Analysis

by Simon Dietz and Cameron Hepburn

- Conventional cost-benefit analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal in the sense that it will not significantly change relative prices. In particular, it is assumed that the policy or project does not change the underlying growth rate of the economy. However, these assumptions may be inappropriate in some important circumstances, such as large development projects in small economies, or large-scale infrastructure investment programmes. This paper develops the theory on the evaluation of non-marginal policies and projects, with an empirical application to the mitigation of global climate change.

Dietz, S. and C. Hepburn (2010). "On Non-Marginal Cost-Benefit Analysis." Grantham Research Institute on Climate Change and the Environment Working Paper No. 18, Mar 2010.