Chapter 7 Flashcards
What is the cost-benefit analysis?
A tool for policy analysis that attempts to monetize all the costs and benefits of a proposed action to determine the net benefit.
What are the steps for cost-benefit analysis?
- List all the costs and benefits one can think of in relation to a proposed action.
- For costs and benefits ordinarily measured in monetary units, such as the cost of installing pollution control equipment, obtain reliable estimates.
- For costs and benefits not ordinarily measured in monetary units, such as human health or ecosystem impacts, use nonmarket valuation techniques to obtain estimates.
- If actual nonmarket values cannot be estimated due to budgetary or other constraints, consider transferred values or expert opinions.
- Add up all the costs and all the benefits, preferably under a range of plausible assumptions or scenarios.
- Compare total costs to total benefits to obtain a recommendation
What are the two main ways of presenting the bottom-line result of a CBA?
Net benefits and the benefit/cost ratio
How to find the net benefits?
total benefits minus total costs.
How to find the benefit/cost ratio?
total benefits divided by total costs.
What does it mean if the benefit/cost ratio is less than 1?
If it’s less than 1 then the costs are greater than the benefits
What is discounting rate?
Costs and benefits that occur in the future should be assigned less weight (discounted) relative to current costs and benefits
How do economists value future costs and benefits?
They value future costs and benefits through discounting.
Is a high or low discount rate inherently better for environmental protection?
A low discount rate is inherently better for environmental protection because it thinks about the future more than the present.
What is the discounting rate formula?
PV(Xn) = X/(1+r)^n
n: number of years in future
X: future value
PV: present (or discounted) value of $X in nth year
r: discount rate (annual rate at which future values are reduced, expressed as a proportion)
What is the “correct” discount rate?
Equals to the rate of low-risk investment such as government bonds
What is risk?
Term used to describe a situation in which all potential outcomes and their probabilities are known or can be accurately estimated.
What is uncertainty?
term used to describe a situation in which some of the outcomes of an action are unknown or cannot be assigned probabilities
What is an example of a risk?
The risk of an accident or release of radiation of a nuclear power plant.
What is an example of uncertainty?
Effects of global climate change is not always accurately predictable
How do economists calculate the expected value?
EV = (p(xi)*NB(xi))
p(xi): probability of xi
NB(xi): net benefit (or cost)
i: the number of outcomes
What is benefit transfer?
Assigning or estimating the value of a resource based on prior analysis of one or more similar resources.
What is sensitivity analysis?
An analytical tool that studies how the outputs of a model change as the assumption of the model change.
Limitations of the Cost-Benefit Analysis
Discount rate
nonuse values can only be estimated by the stated preference methods
estimating all nonmarket impacts in monetary units may not be feasible/desirable.
What are the two alternatives to cost-benefit analysis?
Cost-effectiveness Analysis
Positional Analysis
What is cost-effectiveness analysis?
A policy tool that determines the least-cost approach for achieving a given goal.
What is 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.
What is the difference between CB analysis and cost-effectiveness analysis?
It differs by seeking to determine the least-cost way of achieving a given poly goal, while cost-benefit analysis directly requires outcomes to have a monetary value.
What is the difference between CB analysis and positional analysis?
In this approach, estimates of the economic costs of a particular policy are combined with an evaluation of the effects on different groups of people, possible alternative policies, social priorities, individual rights, and goals and objectives other than economic gain.
