Distortions in estimating net benefits of regional development projects

Abstract

One of the oldest and most standardized procedures in assessing regional impact is the calculation of the number of jobs expected to result from the funding of a proposed project. Procedures for estimating expected job expansion date back to the early 20th Century. Before then, evaluation, especially of publicly funded or sponsored projects, was seen essentially as a political process; evaluation with implicit net benefits determined by legislative debate. The role for explicit economic analysis was limited. The pre-cursor of modern welfare economics began in the 18th Century (Bentham 1789). The essential principle involved viewed outlays by individuals as moving along a “hill of pleasure” to achieve the greatest utility, subject to their income. The aim of policy was to distribute income and or identify public projects so as to achieve “the greatest good for the greatest number”. By late 19th Century, this principle came to be less ambiguously formulated (Edgeworth 1881) when it came to be viewed as an overall allocation of resources so as to maximize aggregate satisfaction by equalizing marginal utilities of income over all individuals. Realizing that not everyone gained from government intervention, Vilfredo Pareto added the condition that the “gains to the gainers” exceed the “losses of the losers” (Pareto 1906). Finally, in A. C. Pigou (1920), Marshall (1928), and Nicholas Kaldor (1939) these changes in aggregate welfare would depend on whether or not the gainers from any initiative could, in principle, compensate the losses to the losers. These theoretical developments laid out the possibilities of constructing an actual “calculus of welfare maximization”. Dramatic floods in eastern U.S. in the late 19th and early 20th Centuries resulted in thousands of deaths and extensive property damage, leading to widespread interest in the Federal government assuming some responsibility for flood control, along with their historic interest in