An Aggregate Measure for Benefit Cost Analysis

The Kaldor-Hicks (KH) criterion has long been the standard for benefit-cost analysis, but it has also been widely criticized for ignoring equity and, arguably, moral sentiments in general. We suggest replacing KH with an aggregate measure called KHM, where the M stands for moral sentiments. KHM simply adds to the traditional KH criterion the requirement that any good for which there is a willingness to pay or accept count as an economic good. This suggested expansion of KH, however, must confront objections to counting moral sentiments in general and non-paternalistic altruism in particular. We show that these concerns are unwarranted and suggest that the KHM criterion is superior to KH because it provides better information.