Costbenefit Analysis

1
Cost-benefit Analysis

• Determining the net benefits associated with a
  project or action.
• PVB PVC PVNB
• CBA as a framework or tool
• Moral and ethical issues
• Mechanical issues

2
CBA as a Decision Framework or Tool

• Should actions be avoided if the costs exceed the
  benefits? (Is a utilitarian perspective
  warranted?)
• Should / can we express all costs and benefits
  associated with a particular action in (or some
  other common denominator)?
• Is it worthwhile trying to collect the data to
  quantify the costs and benefits associated with
  an action?

3
Points to Consider

• Even if PVB gt PVC, the action may be undesirable
  because of issues related to fairness, morality,
  or other measures.
• CBA is far from perfect
• What is the alternative should we attempt to
  make decisions without considering the costs and
  benefits?

4
Points to Consider

• CBA helps illuminate certain issues it does not
  make the decision for us
• For example
• The analyst decides what costs and benefits to
  consider that is, which to quantify. The
  framework does not dictate what is a cost or
  benefit, or what to do at the end of the analysis.

5
Mechanical Issues

• Net Present Value (PVB PVC)
• Benefit Cost Ratio (PVB/PVC)
• Internal Rate of Return
• (set PVB PVC 0 and solve for r)
• Are the different approaches effectively the
  same? If not, which is the preferred method?

6
The Importance of Nonmarket Values

• When calculating costs and benefits how do you
  account for pollution costs where there is no
  obvious market price or value?
• what about the benefit people derive from clean
  air, healthy ecosystems, open space, etc? We do
  not buy these things in the marketplace, but
  certainly want to consider them when analyzing
  the net benefits of a given project.

7
Values in Economics

• Use value
• For example the harvest of salmon for food
• Commercial activities can use available market
  data (noting that price does not equal value!)
• Sport activities market data provides insights
• Subsistence activities what were the avoided
  expenditures?

8
Values in Economics (cont.)

• Non-use Value
• Option Value
• including scientific value
• Cultural Value
• Existence Value (?)

9
Estimating Nonmarket Values

• Contingent Valuation
• Survey methods
• WTP vs. WTA (to be covered later)
• Travel Cost
• Estimating what people are willing to pay to use
  or protect certain resources based on what they
  pay for related travel

10
Travel Cost
Travel Cost per Visitor ()
Demand Curve
Consumer Surplus
Travel Cost
Annual Visitors
11
Estimating Nonmarket Values

• Contingent Valuation
• Travel Cost
• Hedonic Analysis
• Often associated with real estate values
• If you think of an experience or place as a
  bundle of resources, you can imagine finding
  similar experiences or places that differ in
  certain dimensions only. You can also imagine
  isolating the contribution of the unique
  dimensions.

12
Related Topics

• Uncertainty
• Actually need to think about expected costs
  and benefits
• Changes in costs and benefits over time
• A priori estimates of the cost of compliance
  with environmental regulations are notoriously
  high compared to the actual costs

13
Related Topics (cont.)

• Choosing the discount rate
• CBA vs. Impact Analyses and Other Methods

14
Role Playing (for Friday May 5 12)

• Understanding your constituency group
• Week 1 Very short presentations
• Week 2 Response to proposed management strategy
  with discussion

15
Assignments for Role Playing

• Fishing Darcey
• Restoration Cameron and Mark
• Tribes Erica and Jennifer
• Environmental advocacy Ethan and Danielle
• Farming Ryan and Alex
• Developers
• Admin / regulatory