View source for Limits of economic analysis

[[Category:Economic]][[Category:Ethical]]


[[File:ae.png|25px|right|This is a page providing background in a specific field of expertise]] [[Economic tools]] facilitate in the preparation of a robust urban plan and can help with making a city more resilient against crime and terrorism, but there are also some fundamental and methodological '''limits of economic analysis/tools''' that have to be considered.

==Consequential focus==
Economic tools such as the [[Social cost-benefit analysis|cost-benefit analysis]] assume a basic rationale that things are worth investing in if the positive effects outweigh the negative ones. This imposes an evaluation of costs and benefits with a focus on the consequences of the respective decisions<ref>Sen, A.K.(2000): The discipline of cost-benefit analysis. Journal of Legal Studies 29(S2): p. 936.</ref>. However, this guidance by consequences can violate fundamental rights (such as civil rights) and is irrespective of actions based on their “rightness” or “duty/obligation”.

An example:
The aim of a social cost-benefit analysis is to select the project with the highest social cost-benefit ratio that will lead to a maximisation of wealth for society. But what if the planned expansion of a new airport will indeed increase the (economic) well being of a region, but at the same time will significantly reduce the quality of life for people living close to the airport? Put differently, does a society have the obligation to protect the rights of all its citizens (including future citizens) or only the present majority?

==Assumed complete knowledge==
Economic analysis tends to assume “completeness of knowledge” of all the effects and corresponding weights<ref>Sen, A.K.(2000): The discipline of cost-benefit analysis. Journal of Legal Studies 29(S2): p. 939.</ref>. Apart from the fact that the used techniques are an estimate rather than a precise measurement, there is the risk in daily practice that in search of completeness the economic analysis results in judgements that are without justification, which, according to Sen<ref>Sen, A.K.(2000): The discipline of cost-benefit analysis. Journal of Legal Studies 29(S2): p. 941.</ref>,(an Indian economist and a Nobel laureate who has made contributions to welfare economics, social choice theory, economic and social justice, economic theories of famines, and indexes of the measure of well-being of citizens of developing countries) results in ignoring “the less exactly measured consequences or less clearly agreed values, even though they may be extremely important”<ref>Sen, A.K.(2000): The discipline of cost-benefit analysis. Journal of Legal Studies 29(S2): p. 941.</ref>. Examples of these often ignored consequences are the environmental effects, the effects on quality of life, etc.

An example:
It is common practice for social cost-benefit analysis to place a monetary value on human life, for example, when assessing safety measures against terrorism or road safety. The question is, however, if it is possible to adequately value a human life based on a market valuation system.

==Dominant market thinking==
Economic effects are principally valued according to the market mechanism. However, for a lot of goods (public goods, the environment, etc.) and specific type of effects (e.g. external effects) there exist no markets. As a result, market valuation only admits a narrow class of values, neglecting, for example, distributional issues and changes in values as a result of changes in the urban environment.

== Normative claim==
In theory, economic science does not presuppose a policy preference and the outcomes of a cost-benefit analysis or economic impact study is not the decisive step in the decision-making process. In practice, however, both economists and the public decision makers have to be very careful not to regard the economic analysis as the final/normative step in the decision-making process, and to reduce the multidimensional realm of reality to a financial and market value based model of reality.

==Related subjects==
*[[Economic output]]
*[[Economic tools]]
*[[Economic|Economic main page]]

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