Benefit-cost analysis is based on the twin premises that (1) the purpose of economic activity is to increase the well-being of the individuals who make up the society, and (2) each individual is the best judge of how well off he or she is in any given situation. These premises provide the foundation for the widespread application of benefit-cost analysis in such areas as investments in water resources, transportation projects, and human resource development. They are applicable, as well, to the analysis of public policies toward risk.
If society is to make the most of its endowment of scarce resources, it should compare what it gains from a risk management policy (that is, the benefits) with what it gives up by taking resources from other uses (the costs). The benefits and costs should be valued in terms of their effects on individuals' well-being. Society should undertake risk management activities only if the results are worth more in this sense than what society would forgo by diverting resources from other uses.
A version of this article appeared in print in the May 1989 issue of Resources magazine.
