A3.12 When assessing costs and benefits of different options it may be necessary or desirable to "weight" these costs and benefits, depending on which groups in society they fall on. This is in addition to estimating the "unweighted" costs and benefits, which is the minimum requirement of Social CBA. In weighted analysis, financial benefits for lower income households are given a higher social value than the equivalent benefits for higher income households. Weighted estimates should be presented alongside unweighted estimates to demonstrate the impact of the weighting process.
A3.13 The basis for distributional weights is the economic principle of the diminishing marginal utility of income. It states that the value of an additional pound of income is higher for a low- income recipient and lower for a high-income recipient. Broadly a value of 1 for the marginal utility of income would indicate that the utility of an additional pound is inversely proportional to the income of the recipient. An additional £1 of consumption received by someone earning £20,000 per year would be worth twice as much than to a person earning £40,000. Higher estimates of the marginal utility of income will mean the value of an additional pound declines more quickly relative to increases in income.
A3.14 A review of international evidence provides an estimate of the marginal utility of income at 1.3.36 This is used by DWP in distributional analysis. The estimate of the marginal utility of income can be used to calculate welfare weights to adjust costs and benefits.
_________________________________________________________________________________
36 Layard et al. (2008) "The marginal utility of income" Journal of Public Economics, Vol. 92, pp. 1846-1857.