Ch. 7 - Cost-Benefit Analysis

What are the strengths and limitations of cost-benefit analysis?

-Environmental factors are often involved in CBA and can be some of the most controversial to value. -Another important issue is the valuation of future costs and benefits. -

Benefit Cost Ratio (BCR)

A ratio of benefits to costs. The amount of money a project is going to make versus how much it will cost to build it. The higher these numbers are the better.

Cost-Benefit Analysis (CBA)

A tool for policy analysis that attempts to monetize all the costs and benefits of a proposed action to determine the net benefit.

How can we value the interests of future generations?

Economists use the technique of discounting to balance the needs of the present and future.

How do economists conduct cost-benefit analyses?

To complete a CBA for a particular project or proposal, economists use discounting, valuation, and risk assessment techniques. The results can be used to guide policy decisions, but it is important to keep in mind the possible sensitivity of results to assumptions made, and the limitations of valuation techniques in capturing all relevant environmental and social factors.

Net Beneftis

Total benefits minus total costs

How can we value human life and health?

We must somehow evaluate tradeoffs between environmental protection expenditures and mortality risks, the VSL methodology seeks to estimate society's WTP to avoid a death due to environmental contaminants in terms of economic value.

social discount rate/ social rate of time preference (SRTP)

a discount rate that attempts to reflect the appropriate social valuation of the future.

wage-risk analysis

a method used to estimate the value of a statistical life based on the required compensation needed to entice people to high-risk jobs

positional analysis

a policy analysis tool that combines economic valuation with other considerations, such as equity, individual rights, and social priorities; it does not aim to reduce all impacts to monetary terms.

sensitivity analyis

an analytical tool that studies how the outputs of a model change as the assumptions of the model change.

cost-effectiveness analysis

an economic analysis that seeks to determines the least-cost way of achieving a given policy goal

Benefit Transfer

assigning or estimating the value of a resource based on prior analysis of one or more similar resources

benefit transfer

assigning or estimating the value of a resource based on prior analysis of one or more similar resources

real or inflation-adjusted dollars

monetary estimates that account for changes in price levels over time

net present value (NPV)

present value of benefits minus present value of costs

discount rate

the annual rate at which future benefits or costs are discounted relative to current benefits or costs

discounting

the concept that costs and benefits that occur in the future should be assigned less weight (discounted) relative to current costs and benefits

present value

the current value of a stream of futures costs or benefits; a discount rate is used to convert future costs or benefits to present values

pure rate of time preference

the rate of preference for obtaining benefits now as opposed to the future independent of income level changes

risk aversion

the tendency to prefer certainty instead of risky outcomes, particularly in cases when significant negative consequence may result from an action.

precautionary principle

the view that policies should account for uncertainty by taking steps to avoid low-probability but catastrophic events

expected value (EV)

the weighted average of potential values.

value of a statistical life (VSL)

the willingness to pay of society to avoid one death based on the valuations of changes in the risk of death