Question

Consider governments and corporations. Which one frequently ignores cost-benefit analysis, and which one almost always tries to efficiently balance costs and benefits? Explain.

A. Corporations frequently ignore cost-benefit analysis because they do not directly bear the cost of inefficient policies. Governments almost always try to efficiently balance costs and benefits because they must answer to owners and shareholders who want profit.

B. Governments frequently ignore cost-benefit analysis because they do not directly bear the cost of inefficient policies. Corporations almost always try to efficiently balance costs and benefits because they must answer to owners and shareholders who want profit.

C. Corporations frequently ignore cost-benefit analysis because they can sell bonds or stocks to obtain more money whenever needed. Governments almost always try to efficiently balance costs and benefits because they are required to do so by law.

D. Governments frequently ignore cost-benefit analysis because they can print more money if needed. Corporations almost always try to efficiently balance costs and benefits because they are required to do so by law.

Answer 1

Correct answer: B.

Why: Governments often don’t directly bear the full private costs of inefficient programs (costs are diffuse across taxpayers, future generations, or inflation), face political incentives and bureaucratic principal–agent problems, and therefore frequently ignore strict cost–benefit calculation. Corporations, by contrast, operate under profit and market discipline: owners/shareholders, competition, the threat of takeover or bankruptcy and price signals push firms to weigh costs against benefits and allocate resources efficiently.

(That said, neither statement is absolute: governments sometimes do careful CBA, and firms can act inefficiently because of agency problems, regulation, externalities, or short-termism.)