Cost-Benefit Analysis and Ethical Issues in Business - Literature review Example

Cost Benefit Analysis and Ethical Issues Introduction Cost benefit analysis is an important tool of decision making. It enables decision makers to determine the right course of action when faced with different options to choose from. Cost benefit analysis entails calculating the costs of given courses of action and comparing them with their benefits. This decision making analysis tool has increasingly been used in making decisions related to ethical issues. It enables managers to find information about economic efficiency of ethical issues including health-related and environmental issues. Ethical issues of equity and fairness are always the key considerations of decisions that relate to the environment and the society. Cost-effective analysis is also needed by businesses to enhance better regulation and efficiency in resource allocation and as part of ethical decision making. Despite the relevance of cost-benefit analysis in decision making about ethical issues, it has certain flaws that may limit its effectiveness. This paper analyses the limits of cost benefit analysis as applied to an ethical issue. To achieve this, the author uses two examples: decision about purchasing protective items at the workplace and decision about cleaning up toxic wastes in the environment. For both of these examples, there are costs and benefits that need to be analysed in order to make the right decision that will minimise costs and maximise benefits. However, various limits may affect the effectiveness of the cost benefit analysis method when analysing decisions about these ethical issues. Although it may appear quite reasonable, cost benefit analysis does not lack its own limits just like any other tool of analysis. Ethical Issues Purchasing protective devices at the Workplace In order to use cost-benefit analysis successfully, managers should use the same measurement scale. For example, the measuring scale of a cost-benefit analysis involving purchase of protective devices may be in dollars. In this case, the costs of purchasing the protective items, the costs of bringing them to the workplace, and the cost of training employees to use them will be expressed in dollars. The benefits of the protective devices can then be measured in terms of dollars to be saved from medical charges that could be incurred if the employed would be injured at the workplace. However, the problem arises when the items to be bought are very expensive. It may also be difficult to determine the value of human life that may be lost due to the failure to wear protective materials. In this case, it becomes difficult for managers to use cost/benefit analysis as a decision making tool in regards to ethical issues. Clean up of Toxic Wastes Manufacturing companies often release toxic substances that may affect the lives of people and may cause loss of lives. For example, some manufacturing activities may release toxic substances and chemicals that may result in loss of plant and animal life (Hanley & Spash, 1993). Businesses also need to carry out cost-benefit analysis about the clean-up of toxic substances because they may be engaged in the cleanup of toxic substances released by various economic activities of the business. The toxic substances are dangerous to human health and the environment, and businesses have obligations to clean them up for the sake of the safety and health of the general public as well as the protection of the environment (Hanley & Spash, 1993). For instance, the U.S. Environmental Protection Agency (EPA) uses approximately $6.1 billion every year to clean up toxic wastes. As a result, approximately 500 cancer deaths are prevented each year. Cost benefit analysis would therefore suggest that a cost of $12.2 million is incurred for each life saved. Considering the high cost of saving a life as derived from cost-benefit analysis, it is important to consider the limits of cost benefit analysis. The Limits of Cost/Benefit Analysis in Ethical Considerations After examining the two examples of ethical issues, it is now important to turn to the real limits or flaws of cost/benefit analysis. Researchers have shown that this method of decision making has a lot of limits based on its approach of assigning monetary value to the costs and benefits of ethical issues, which in most cases are not necessarily measured in monetary units (Zinke, 1987). For instance, the costs incurred when a family loses their member through toxic substances and chemicals at the workplace are not measured in monetary terms (Puttaswamaiah, 2002). The emotional and psychological experience that family members go through and their welfare thereafter cannot be measured in monetary terms. Therefore, the cost-benefit analysis does not provide a sufficient analysis of the decision to be made. It may be appropriate for the government or companies to pursue some ethical programs despite having more monetary costs than benefits because they are important for social welfare. Specifically, ethical issues that deal with health, safety and the environment are difficult to quantify in monetary terms, and have caused limits to the use of cost benefit analysis for heath regulation and environmental protection. Kelman (1981) examines the use of cost benefit analysis in environmental, health and safety regulations from an ethical theory perspective – the morally right courses of action to take in specific situations. Although the question of whether benefits outweigh costs is a sufficient question to ask when making decisions, it is not always the case for all decisions. Cost benefit analysis requires numerical values to be assigned to the ethical decision making choices including the number of lives saved. Sometimes these monetary values of ethical issues are impossible to achieve, and may result in inconsistent answers that make decision making difficult or inaccurate. Similarly, it is difficult to value nature or the environment (Faure & Skogh, 2003). For example, it is difficult to measure the benefits of saving fishes through cleanup of wastes (Dijkgraaf and Vollebergh, 2004). There is also no way that a business can determine the value of its ethical decisions to clean up the environment with respect to protecting plant life. These measurement problems limit the use of cost-benefit analysis in decision making relating to environmental issues. From the utilitarian perspective, the ethical or morally right thing to do is to maximize the attainment of human satisfaction. This is achieved when the benefits of an action outweigh its costs. However, Kelman (1981) suggests that this perspective makes cost benefit analysis to be ethically problematic when making decisions because determining what is right or wrong in an ethical perspective is preferred to calculating costs and benefits. In this case, there are circumstances in ethical decision making where a given decision may be right even though its costs are more than its benefits, or a given decision may be morally wrong even if its benefits outweigh its costs. Utilitarian perspective is also based on the utility theory in which resources are allocated based on expected utility. This theory can be used to identify the course of action that maximizes expected utility of potential outcomes (Kelman, 1981). A rational decision maker from a utilitarian school of thought chooses courses of action starting with those that have the highest expected utility (Pinkerton et al, 2002). This perspective is likely to ignore projects that have low expected utility even though they morally right. Cost benefit analysis helps utilitarian decision makers to calculate the expected utility in a quantifiable manner. Therefore, it is inappropriate for choosing ethical alternatives in decision making. In the example of deciding to purchase protective materials to enhance safety and health at the workplace, the cost of purchasing the materials may outweigh the monetary benefits of saving lives, but it is morally right to do so because a company is ethically mandated to protect the lives of its employees by providing good working conditions for them (Bequele, 1984). Therefore, using cost benefit analysis is not appropriate when analysing decisions that involve ethical decision making because it may neglect the decisions that are considered morally right at the expense of decisions that are beneficial in monetary terms. Another limit of cost-benefit analysis is that it ignores the aspect of social welfare in decision making (Zerbe, 1998). Welfare economics is an important branch of economics which is concerned with the maximization of social welfare (Pinkerton et al, 2002). This school of thought assumes that each member of the society has a unique functional preference in relation to consumption of goods and services in order to achieve utility (Pinkerton et al, 2002). Social welfare is therefore a function of preferences of members of the society. Decision makers should therefore consider the social standing of the potential beneficiaries of their ethical policies in order to achieve distributive equity based on the preferences of each member in the society and overall social welfare in the society. Cost benefit analysis focuses on the monetary costs of benefits of ethical decisions and ignore the social costs and benefits that may be experienced. Using the example of cleaning toxic substances from the environment, it is plausible to suggest that the social welfare of the overall community is achieved when the environmental pollution and unhealthy problems associated with toxic substances are reduced significantly (Cairncross, 1993). Although monetary costs incurred through the cleanup process may be higher than the benefits, its overall social welfare results are expected to be high. For example, the U.S. Environmental Protection Agency (EPA) uses approximately $6.1 billion every year to clean up toxic wastes. Only 500 lives are saved from cancer. According to cost benefit analysis, the cost of saving a single life is $12.2 million every year. It is evident here that the cost of cleaning toxic wastes is higher than its benefits. However, the social welfare of the people is achieved because people will live happily without the worry of losing their relatives or friends. Obviously, the preference of most people is to achieve fewer cancer deaths. If the cleanup of toxic wastes leads to reduction of cancer deaths, then the preferences of individual members is achieved, and the overall social welfare of the society is also attained. Therefore, cost benefit analysis is not a sufficient method of decision making in relation to ethical issues because it focuses on the monetary amount of costs and benefits rather than the overall social welfare associated with the decision. Societal and political factors also limit the effectiveness of cost-benefit analysis when applied to an ethical issue in business (McDavid et al, 2013). These factors include rational and extra-rational factors that limit the application of cost-benefit analysis to ethical decision making in business. Societal rational factors examine the costs of the society using an average individual in the society. It does not express the costs in respect to specific individual in the society (McNamee & Andersson, 2015). As a result, the business faces the challenge of applying cost benefit analysis because different stakeholders of the business have different rational perspectives and economic benefits. This can be applied in the decision to purchase protective materials at the workplace in order to enhance safety and health of workers. Cost benefit analysis will determine the overall costs of purchasing the items without regard to the societal and political perspectives of stakeholders. For instance, the purchase of helmets and protective gears may be too costly compared to its benefits, but the government regulations may require the company to purchase them (Edelman et al, 2013) If the business declines to follow the regulations, it may be opposed by the society or the government, and may even be sued in court. So there are social and political factors that affect the decisions made apart from the monetary costs and benefits. Ethical decisions always involve other people and the environment. Therefore, values need to be taken into consideration when making decisions (Kelman, 1981). In cost benefit analysis, the business acts as the agent of various stakeholders. Another limitation of cost benefit analysis is that assigning monetary value to ethical issues not traded in the marketplace is biased and imperfect. Most benefits of environmental and health regulation activities are intangible, and may not be measured easily in monetary terms (Ackerman and Heinzerling, 2004). In our examples, saving human lives and providing cleaner air may not easily be measured in monetary terms. Therefore, when cost benefit analysis is carried out on things not traded in the marketplace, decision making may become biased or imperfect. Conclusion It is clear from this discussion that the use of cost/benefit analysis in decision making involving ethical issues is affected by several limits. Using two examples of ethical issues, the essay suggests that the primary limitation of cost-benefit analysis as applied to ethical issues in business is the fact that it is difficult to assign monetary value to environmental and human health regulations in the society. Application of cost benefit analysis to things not traded in the marketplace is biased and imperfect. Societal and political factors also affect the decision making of businesses, and the use of cost-benefit analysis is likely to neglect the societal and political preferences of stakeholders. In terms of social welfare, cost-benefit analysis may override individual preferences of members of the society. From the examples used, cleanup of toxic wastes and purchase of protective materials for workers are considered to have social welfare and moral implications that are ignored by cost benefit analysis. References list Ackerman, F. and Heinzerling, L. 2004. Priceless: On Knowing the Price of Everything and the Value of Nothing, The New Press, New York. Bequele, A. 1984. “The costs and benefits of protecting and saving lives at work: Some issues”, International Labour Review, Vol. 123, No. 1, pp. 1-16. Cairncross, F. 1993. “Waste and the Environment”, Economist, vol. 327, no. 7813, pp. 567-587. Dijkgraaf, E. and Vollebergh, H.R.J. (2004). “Burn or bury? A social cost comparison of final waste disposal methods”, Econological Economics, Vol. 50, pp.233-247. Edelman, C., Mandle, C.L., & Kudzma, E.C. 2013. Health promotion throughout the life span. Elsevier, St. Louis, Missouri. Faure, M., & Skogh, G. 2003. The economic analysis of environmental policy and law: An introduction, Edward Elgar, Cheltenham, UK. Hanley, N., & Spash, C.L. 1993. Cost-benefit analysis and the environment, E. Elgar, Aldershot, Hants, England. Kelman, S. 1981. “Cost-Benefit Analysis: An Ethical Critique”, AEI Journal on Government and Society Regulation, March/April issue, 33-40. McDavid, J.C., Huse, I., Hawthorn, L.R.L., & McDavid, J.C. 2013. Program evaluation and performance measurement: An introduction to practice, SAGE, Los Angeles. McNamee, M.S., & Andersson, P. 2015. “Application of a Cost-benefit Analysis Model to the Use of Flame Retardants”, Fire Technology, Vol. 51, No. 1, pp. 67-83. 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