2 X 2 diagrams are useful and clarifying and encountered for lots of choice scenarios; Pascal's wager and the Prisoners' dilemma are examples. In the case of CBA, the big question is "whose costs and benefits are we talking about." If the answer is "social costs and benefits," unless the gap is completely large and obvious to just about everyone, the notion of CBA is more misleading than helpful.
Yes, this is a point worth making--or (I hope) worth reminding people to consider. But for anyone claiming any sort of logical understanding of costs and benefits, this should be OBVIOUS.
But I suppose we do need to remind people (dummies?) of this, and--more fundamentally--that all benefits have costs (and trade-offs, consequences, etc.).
But there are a couple of serious problems with this diagram.
First, one confronts multiple opportunities to earn benefits by bearing costs simultaneously, so the problem isn't just to pounce on an opportunity when the benefits exceed the costs. One wants to "Do it!" only when the expected differential between discounted benefits and discounted costs (i.e. the expected present value of the opportunity) is maximized relative to all the other available opportunities.
Second, rational cost/benefit calculations _require_ profit-and-loss motivated entrepreneurs making decisions in the context of competitively-generated market prices. An entrepreneur's task is to mobilize one's (possibly unique) knowledge to anticipate how future prices might differ from present prices and how conditions of production might change over time, and to correct errors in prior decisions as profits or losses emerge from them. The ability to correctly quantify costs and benefits across a vast array of conceivable opportunities, to mobilize decentralized knowledge, and to correct errors in decisions are all essential to the integrity of cost/benefit decision-making.
The advice should always be "Don't do it!" whenever these requirements are breached. If there is no competitive process for generating prices, or if the decision-maker is not influenced by whatever profits or losses will arise from their decisions, the decision-making process will be deeply compromised. Of course that's not what the public policy wonks want to hear, but it is the truth.
Some advice I give to husbands if they ask for it: If your wife puts a high benefit on something that you can provide at a low cost, do it.
I applied this principle for years (before we got our Nespresso.) I would go to Starbucks on mornings that I didn't have an early class and get my wife her latte.
Too obvious to post.
If we’re talking about government action, the costs are borne by someone else and the benefits are imaginary. That diagram would give me agita.
2 X 2 diagrams are useful and clarifying and encountered for lots of choice scenarios; Pascal's wager and the Prisoners' dilemma are examples. In the case of CBA, the big question is "whose costs and benefits are we talking about." If the answer is "social costs and benefits," unless the gap is completely large and obvious to just about everyone, the notion of CBA is more misleading than helpful.
Bryan, are you writing "Economics for Dummies"?
Yes, this is a point worth making--or (I hope) worth reminding people to consider. But for anyone claiming any sort of logical understanding of costs and benefits, this should be OBVIOUS.
But I suppose we do need to remind people (dummies?) of this, and--more fundamentally--that all benefits have costs (and trade-offs, consequences, etc.).
But there are a couple of serious problems with this diagram.
First, one confronts multiple opportunities to earn benefits by bearing costs simultaneously, so the problem isn't just to pounce on an opportunity when the benefits exceed the costs. One wants to "Do it!" only when the expected differential between discounted benefits and discounted costs (i.e. the expected present value of the opportunity) is maximized relative to all the other available opportunities.
Second, rational cost/benefit calculations _require_ profit-and-loss motivated entrepreneurs making decisions in the context of competitively-generated market prices. An entrepreneur's task is to mobilize one's (possibly unique) knowledge to anticipate how future prices might differ from present prices and how conditions of production might change over time, and to correct errors in prior decisions as profits or losses emerge from them. The ability to correctly quantify costs and benefits across a vast array of conceivable opportunities, to mobilize decentralized knowledge, and to correct errors in decisions are all essential to the integrity of cost/benefit decision-making.
The advice should always be "Don't do it!" whenever these requirements are breached. If there is no competitive process for generating prices, or if the decision-maker is not influenced by whatever profits or losses will arise from their decisions, the decision-making process will be deeply compromised. Of course that's not what the public policy wonks want to hear, but it is the truth.
Tell me you've never worked in the private sector... this diagram is literally how every firm does ballpark prioritization of initiatives.
Some advice I give to husbands if they ask for it: If your wife puts a high benefit on something that you can provide at a low cost, do it.
I applied this principle for years (before we got our Nespresso.) I would go to Starbucks on mornings that I didn't have an early class and get my wife her latte.
Most ignore the cost side of the equation
Also useful for things like Probability versus Impact.