Integrating Heterogeneity into Benefit-Cost Analysis

Generally, benefit-cost analyses are conducted based on impacts on an average member of the population—that is, a person with median characteristics. Often, however, the populations affected by government policies vary from the median in significant ways. Heterogeneity by age, race, income, and other factors is relevant to the assessment of the benefits and costs of particular policies. On the benefits side, certain groups face higher levels of exposure to environmental harms and, where the dose-response functions are non-linear or where exposure to different pollutants results in synergistic harms, these groups face higher harms from exposure to an additional unit of pollution than does an average member of the population. Also, certain groups have higher vulnerability per unit of exposure to particular exposures. And, on the cost side, certain groups bear higher burdens because of differences in geography, spending patterns, and other behaviors. This Article provides a robust review of the scientific, epidemiological, and economic literature for each of these mechanisms, surveys what agencies have already done, and sets forth an agenda for future research.
The consideration of the distribution of costs and benefits of policies can lead to large differences in the assessment of benefits and costs. As a result, a benefit-cost analysis based on impact to the average member of the population would significantly underestimate the benefits of regulatory protections, both because the actually affected population may be at higher risk and because these high outliers raise the overall population risk.