7.4.1 Simple Profit or Benefit-Cost Ratio Maximization
The welfare function considers only direct, unweighted monetary costs and benefits.
The advantages include:
(a) this approach guarantees efficiency;
(b) if income and wealth distributions concern the state, these can be better be
directly adjusted by tax and budgetary policies; and
(c) project redistributive effects, which are likely to be quite small, individually.
Opponents argue that public disbursement can be used for income reallocation.
They point out that the selection, among potential policies in providing public
transport or in financing new houses, does significantly influence which economic
groups do not benefit and which ones do.
7.4.2 Profit Maximization with Inclusion of Secondary Social
Benefits and Costs
In this approach, apart from direct project costs and user benefits, the project’s
environmental costs to neighbours are added. The view is that benefits and costs
should be considered in monetary terms, notwithstanding who is affected. Contrary
to behavioural economics theory (Kahneman 2012), a secondary benefit of Rs.100 to
a millionaire is assigned the same weightage as a Rs.100 benefit to a poor person.
This approach presents obvious political faults, but is often used in selecting among
irrigation and flood control projects and alternative highway projects and in planning. The arguments in favour of this method include (1) an improvement on method
1 and (2) there is no other method which is efficient, practical, and reasonably
acceptable. Challengers assert better rationality for methods 3 and 4 below.
7.4.3 Profit Maximization with Constraints
This is a fairly easy approach to include a degree of social redistribution. Thus, one
might choose the most profitable motorway route, in terms of construction economy
and value to users, depending on arbitrarily set specifications for (1) comfort to
neighbours and (2) employing minority groups in construction work. This approach
bothers both supporters and detractors of profit maximisation given that the social
constraints must usually be established, sometimes, arbitrarily and irrationally.
7.4 Social Welfare Functions
195
The welfare function considers only direct, unweighted monetary costs and benefits.
The advantages include:
(a) this approach guarantees efficiency;
(b) if income and wealth distributions concern the state, these can be better be
directly adjusted by tax and budgetary policies; and
(c) project redistributive effects, which are likely to be quite small, individually.
Opponents argue that public disbursement can be used for income reallocation.
They point out that the selection, among potential policies in providing public
transport or in financing new houses, does significantly influence which economic
groups do not benefit and which ones do.
7.4.2 Profit Maximization with Inclusion of Secondary Social
Benefits and Costs
In this approach, apart from direct project costs and user benefits, the project’s
environmental costs to neighbours are added. The view is that benefits and costs
should be considered in monetary terms, notwithstanding who is affected. Contrary
to behavioural economics theory (Kahneman 2012), a secondary benefit of Rs.100 to
a millionaire is assigned the same weightage as a Rs.100 benefit to a poor person.
This approach presents obvious political faults, but is often used in selecting among
irrigation and flood control projects and alternative highway projects and in planning. The arguments in favour of this method include (1) an improvement on method
1 and (2) there is no other method which is efficient, practical, and reasonably
acceptable. Challengers assert better rationality for methods 3 and 4 below.
7.4.3 Profit Maximization with Constraints
This is a fairly easy approach to include a degree of social redistribution. Thus, one
might choose the most profitable motorway route, in terms of construction economy
and value to users, depending on arbitrarily set specifications for (1) comfort to
neighbours and (2) employing minority groups in construction work. This approach
bothers both supporters and detractors of profit maximisation given that the social
constraints must usually be established, sometimes, arbitrarily and irrationally.
7.4 Social Welfare Functions
195