Abstract: Important results in the applied welfare literature are used to extend a conventional Harberger cost-benefit analysis. A conventional welfare equation is obtained for marginal policy changes in a general equilibrium economy with tax distortions. It is extended to accommodate internationally traded goods, time, income taxes, and non-tax distortions, including externalities, non-competitive behaviour, public goods, and price-quantity controls. The welfare analysis is developed in stages, and where possible is explained using diagrams, to make it more amenable to the different institutional arrangements encountered in applied work. Computable welfare expressions are solved using demand-supply elasticities. In a conventional cost-benefit analysis, lump sum transfers are used to separate the welfare effects of individual policy variables. This is important because it allows policy evaluation to be divided across specialist agencies. These transfers are carefully examined to identify the important role played by the marginal social cost of public funds (MCF) in policy evaluation when governments balance their budgets with distorting taxes. This book separates income effects for marginal policy changes in the shadow value of government revenue. As a scaling coefficient that converts efficiency effects into dollar changes in private surplus, it makes income effects irrelevant in single (aggregated) consumer economies, and conveniently isolates distributional effects in heterogeneous consumer economies. This decomposition is used to test for Pareto improvements, and to examine the separate, but related roles of the shadow value of government revenue and the MCF in applied work.

Keywords: cost-benefit analysis, distributional effects, marginal excess burden of taxation, marginal social cost of public funds, market distortions, optimal taxation, public good provision, revised Samuelson condition, shadow discount rate, shadow exchange rate, shadow prices, shadow value of government revenue