Welfare economics is incomplete as it analyzes preference without going on to analyze welfare (or happiness) which is the ultimate objective. Preference and welfare may differ due to imperfect knowledge, imperfect rationality, and/or a concern for the welfare of others (non-affective altruism). Imperfection in knowledge and rationality has a biological basis and the resulting accumulation instinct amplifies with advertising-fostered consumerism to result in a systematic materialistic bias, as supported by recent evidence on happiness and quality of life. Such a bias, in combination with relative-income effects, environmental disruption effects, and over-estimation of the excess burden of taxation, results in the over-spending on private consumption and under-provision of public goods, and may make economic growth welfare-reducing. A cost-benefit analysis aiming even just at preference maximization should offset the excess burden of financing for public projects by the indirect effect through the relative-income effect and by the environmental disruption effect. A cost-benefit analysis aiming at welfare maximization should, in addition, adjust the marginal consumption benefits of public projects upward by a proportion determined by the proportionate excess of marginal utility over marginal welfare of consumption. The environmental disruption effects have also to be similarly adjusted upward. However, the productive contributions of public projects should not be so adjusted.
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