Topic 4: BCA Flashcards
Total benefit =
Sum of benefit for each year
Benefit: Cost Ratio
If on limited budget, best strategy: fund those projects that have BCR
BCR = Expected benefits/costs
Uncertainty: filling the knowledge gaps
Elicit info from experts (educated guesses)
Extrapolate from similar projects- learn from experience
Conduct new research
Adaptive management
Uncertainty: in decision making
Note areas of uncertainty
Note degree of uncertainty
Conduct Sensitivity Analysis: test how much answers change if we vary levels for uncertain variables. See if answer is robust
How to decide if project is good or bad?
- Voting
- Pareto improvement
- Kaldor-Hicks criterion
Pareto improvement
If a change makes at least one person better off without anybody worse off, it is said to be Pareto improvement
Works in free market
Almost no environmental policy or project would satisfy this criterion
Kaldor-Hicks criterion
Those who made better off could be in principle compensate those who are made worse off
Don’t actually have to compensate them/ it is sufficient that they could
Kaldor-Hicks -ves
If applied in simple-minded way -> ignores distribution of benefits and costs
Tends fo favour those with higher wealth, who can afford to pay more for what they want
What economists actually do in BCA
Usually apply Kaldor-Hicks approach (add up all of benefits; add up all of costs. See whether aggregate benefits > aggregate costs)
But if distribution is a concern, we also capture info about who wins, who loses and how much
Up to decision makers to judge whether distributional outcomes are a problem
Maintenance costs
Projects require funding beyond initial project funding to maintain benefits
Should be part of BCA
Tendency for environmental agencies to ignore need for maintenance costs
-> can cause errors
Private costs
People who participate in environmental projects may bear costs as well
Should these costs be included in BCA? It depends
Compliance costs
Costs that participants are required to bear, whether they want to or not, usually due to regulation
Should be included in BCA
If there are any private benefits to these participants, should also be included
Why do marginal costs increase?
For small reductions in environmental damage, you can cherry pick the actions that are cheapest per unit of improvement
Once you’ve exhausted those, you are left with actions that are bit more expensive -> and so on
Voluntary costs
If people participate and bear costs voluntarily-> costs should mot be included in BCA
The fact they are participating voluntarily means they are getting sufficient benefits to offset private costs
BCAs need various info
Environmental conditions without project
Project actions
Environmental conditions with project (cause and effect relationship)
Valuation of benefits in $ terms
Likely degree of behaviour change
Risks to project success
Timing of benefits and costs
Costs of various types
