A Case Study of Marginal Cost Analysis and Weapon System Technology
This report presents a case study of how marginal-cost analysis can be used to influence investment decisions, not only in deciding whether to procure a major weapon system, but also how to invest R&D dollars for maximum potential leverage in the long run. The case involves the strategic defense system that the United States examined in the mid-1980s, following President Reagan's "Star Wars" speech of March 1983. The analysis presented here addresses the relative costs to the defender and the attacker in a race in which attackers added re-entry vehicles and defenders added interceptors. The initial results, based on the technology necessary for near-term deployments (by the year 2004), were very unfavorable. Subsequent analysis considered a variety of plausible technological breakthroughs and highlighted the potential value of what came to be called "brilliant pebbles," although great uncertainty remained about whether a favorable marginal cost ratio could be obtained. While not a complete policy analysis, the study is an important example of systems analysis: it affected policy at the time by tempering the claims of strategic defense enthusiasts and channeling R&D and architecture studies in fruitful directions.