CBA

Question 1

Background of CBA

Answer 1

The reason that we make a cost benefit analysis is that the economic aspects are very important for us. Sometimes we have to choose between the economic costs and the environmental impact and make a balancing between these to, since economic resources are limited and wants are not. Hence, resources need to be allocated. How much are you willing to pay to fulfill your desires?

Question 2

Basic steps of CBA

Answer 2

1. Project definition
2. Identification and qualification of physical impacts
3. Monetary valuation impacts
4. Discounting
5. Application of net present value (NVP) test
6. Sensitivity analysis

Question 3

Weaknesses of CBA

Answer 3

One weakness of CBA is the valuation of the non-market goods. It is based upon people’s moral values. Another weakness is the ecosystem complexity. We are not able to accurately predict the effects of changes in economic activity on complex systems. Also, the discount rate has a lot of uncertainties. It is impossible to know exactly what discount rate to use and if it should be the same for environmental impacts and impacts involving market goods.