16 Jan 2012

How NOT to do benefit-cost analysis

A political economist* has written a study on the effects of piracy on local incomes in Somalia [BBC version], concluding that "the positive economic impacts of piracy are widely spread, so a military strategy to eradicate piracy could seriously undermine local development."

Let's draw a few parallels by analogy, e.g.,
  • The positive economic impacts of slavery are widely spread, so the eradication of slavery could seriously undermine local development.
  • The positive economic impacts of the war on drugs are widely spread, so an end to the war on drugs could seriously undermine local development.
  • The positive economic impacts of attacking foreign nations are widely spread, so an end to war could seriously undermine local development.
What we are seeing here is a classic example of failing to see the forest for the trees. Sure, there's some benefit to pirates who attack, seize and ransom ships, but the negative impacts of these actions -- from direct impacts to shippers, passengers and crews to indirect impacts to consumers and taxpayers -- are far far greater.

Ask yourself this question a different way: is piracy so good for development that we should have it in as many places as possible? I hope you're able to see why that answer is no.

Bottom Line: There are costs and benefits to every activity. It's not just important to make sure that benefits exceed costs, it's important to make sure that those who get the benefits also bear the costs!

* I've been telling people I am a political economist for awhile now, but I just updated the blog banner from "the economics of water (and other stuff)" to "the political-economy of water (and other diversions)." Better?