Equity Weighting: A Brief Introduction

An unfamiliar concept for most that just might make cost-benefit analysis more progressive.

The logic of cost-benefit analysis (CBA) favors the rich over the poor. CBA is based on willingness to pay. In essence, that means voting with dollars, which comes with inherent inequality. There’s a possible fix to this problem, however. It’s called equity weighting. Equity weighting adjusts the monetary values used in CBA to take into account that a dollar to a poor person is worth much more than a dollar to a rich one.

Equity weighting can make a big difference in assessing regulations that heavily benefit disadvantaged communities.  By some estimates, a dollar is worth thirteen times as much in the hands of a poor person as a rich person. That is to say, giving a poor person something worth a dollar improves their lives thirteen times as much as giving the same dollar’s worth to a rich person. Failing to correct for this difference could seriously distort the regulatory process, assuming that we value the welfare of poor people equally with that of the rich.

Equity weighting thus has the potential to make regulation much more progressive.  But there are practical pitfalls that make the choice more complicated. There are also theoretical objections that I won’t discuss because their assumptions are extremely unrealistic. The first practical complication is that welfare weighting has to be done on both sides. If the cost of the regulation falls equally on the poor and the rich in dollar terms, the cost to the poor has to be multiplied to take into account their greater need for the money.  Hence, the regulation is likely to be a bad deal for the poor unless the benefit to them is larger than the cost.   Thus, equity weighting may often favor greater regulation but it could sometimes favor deregulation. For example, equity weighting would increase the social cost of carbon but would also raise questions about regulations that raise the price of electricity, an important expense for poor people.

Second, there are political and legal problems with equity weighting. The political problem is that equity weighting is progressive and therefore is likely to get a hostile reaction from conservatives (including conservative judges). The legal problem is that regulatory statutes such as environmental laws generally don’t have income redistribution as one of their purposes. This raises  the question of whether welfare weighting can be squared with the statute’s purpose. On the other hand, economic efficiency isn’t the purpose of those statutes either, yet courts seem O.K. with conventional cost-benefit analysis, which is based on that goal.

Third, although theoretically CBA should weight the welfare of the poor less than the welfare of the rich, the actual practice of CBA departs in important ways from theory. In particular, risks to life and health are assessed without regard to income.  The same “value of life” is used regardless of whether the risk falls on the rich or the poor.

This way of valuing life and health risks performs at least some of the same work as equity weighting.  If we did equity weighting, we would first look at how much the poor are willing to pay to avoid mortality risks, which would then be multiplied by thirteen (or some other equity weight).  The first stage lowers the benefit of a regulation to the poor, while the second jacks it back up again. If the two effects are largely offsetting, equity weighting may not make much difference on the benefit side of the analysis. However, equity weighting could mean that regulatory costs would get greater emphasis to the extent they fall on the poor.

My inclination is that agencies may not want to adopt equity weighting as the standard method for performing cost-benefit analysis. If the cost-benefit analysis shows greater or roughly equally costs than benefits, however, it may be worth doing an equity weighted analysis to assess whether a regulation’s effect on equity should tip the scales.

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Reader Comments

One Reply to “Equity Weighting: A Brief Introduction”

  1. Very interesting – and I am glad to see this issue, bc it comes up in almost all economic discussions, though only rarely does anyone remark upon it. I agree that a “dollar” does not mean the same thing in reality to any two people, much less to a rich and a poor one. Gender, etc.

    As for “equity weighting,” is this something people are actually trying to do? Bc it sounds like a bit of a mess.

    And I quibble with the idea that CBA is about willingness to pay. As I understand it, it is just a tool to help decide which way of attacking a “problem” is the best. (The other thing hardly anyone ever bothers to do is to actually *define* the problem they are trying to solve.) I am also not sure it inherently privileges rich people – isn’t it more that it just starts from where we are, and therein lies the privilege?

    Air quality f.e. – say we want to look at ways to decrease particulate coming out of trucks. (There was a post here recently about that.) One might look at all the different new truck models, their cost, and examine the industry structure and so forth. How will we finance the move to electric trucks? Are we maximizing our railways? Etc etc. And then there’s all the risk of new tech.

    It seems to me that “equity” isn’t going to enter the picture until the end, or near the end – when we figure out who is going to pay, for whichever approach or approaches seems most *effective.*

    And I’m not sure we need to distort the concept of a dollar – it’s just a unit. In this case, it would mean how much pm or ghg decrease can we – all of us – get for a dollar. (I don’t think that question would involve poverty – though, it would involve nearness to the freeway! Which is *not* the same. Poor people are spread out all over. Poor people *not* near the freeway may appreciate the lower prices. Also the time factor. But economists can factor all that in.)

    The stickier part is, ime, who will *pay* for it?

    Like you said, it might be just as easy to keep a standard CBA approach, while remaining mindful of its limitations – it’s always a bit arbitrary, isn’t it? – and just stick a Rawls analysis onto the end.

    I still don’t understand why we aren’t already buying air cleaners for people who live near freeways. All these other things may take us *years.* We’ve known that stuff is bad for people for a long time now. I wonder if equity weighting is an efficient use of our energy?

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About Dan

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

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About Dan

Dan Farber has written and taught on environmental and constitutional law as well as about contracts, jurisprudence and legislation. Currently at Berkeley Law, he has al…

READ more