ABSTRACT
In the first edition of my Cost-Benefit Analysis (1971), I argued that the basic concept by reference to which gains and losses are to be estimated is the compensating variation (CV). Aside from objections arising from the problems of measurement, in particular of the measurement of the more intangible gains and losses that result from the introduction of an investment project, a number of objections have been argued recently against the use, or against the exclusive use, of the CV concept in cost-benefit analysis. Among those objections that concern us here are three:
that a cost-benefit analysis based on CV alone fails to take account of considerations of equity. In particular, it ignores the distributional effects of a project;
that the CV concept is an unreliable indicator of gains and losses;
that the equivalent variation (EV) concept is, no less than the CV concept, a valid basis for cost-benefit analysis.
