Unit 4: Trade Off Analysis: Ch.7 Flashcards
What is Cost-Benefit Analysis
Measure all costs and benefits of a proposed project/policy in monetary terms
What are the steps of a Cost-Benefit Analysis
- List all costs and benefits to a proposed action
-Obtain estimates for those that have monetary units
-For C/B that don’t have monetary units-use nonmarket valuation techniques to obtain estimates
-If nonmarket values cannot be obtained get transfer values or expert opinions
-Add up all C & B
-Compare C & B to obtain recommendation
What are the Cons of a Cost-Benefit Analysis
-Difficult to estimate nonmarket value impacts
-Does not tell us about the C/B across society
What are the 2 ways Cost-Benefit analysis is presented
1) NET BENEFITS: Total Benefits - Total Costs: if Negative = Costs > Benefits
2) BENEFIT-COST RATIO: Total benefits/ total costs
Ratio < 1 = Costs > Benefits
What are Real/ Inflation Adjusted Dollars
Monetary estimates that account for changes in price levels over time
What is Discounting
Costs and Benefits in the future should be assigned less weight relative to current costs and benefits
How does Discounting look at the future
Devalues impacts in the future as less relevant than the impact now
The further out in time/ or higher discount rate = Lower Present Value
What is the Present Value
Current value of future C/B
What is Discount Rate
Annual rate at which future benefits or costs are discounted relative to current benefits or costs
What is a Higher discount rate in relation to the future
Less value in the future
What is a longer time horizon in relation to value
Less value in the future
What is the relationship b/w Discount rates and Future Impacts
Discount rates make future impacts in the future irrelevant
Not worth it to look at future damage
How does a High Discount Rate look at future
Favours Present over future
How does a Low Discount Rate look at future
Greater weight to Future costs
How are Discount Rates Chosen
1) Set it to equal rate of return on low risk investment (Gvt bonds)
2) Social Discount Rate: appropriate social valuation of the future
What is the Pure Rate of Time Preference
Humans prefer present over future
What is Contigent Valuation
Asks people their willingness to pay for enviromental benefits across time scales
What is Value of Statistical Life
How much society is willing to pay to prevent one death from environmental pollution
What is Value of Statistical Life based on
1) Contingent Valuation
2) Wage Risk Analysis
What is Wage Risk Analysis
the required compensation needed to entice people to high-risk jobs: estimates value of statistical life
What are some critiques of Value of Statistical Life
-lower in developing countries
-estimates increase in proportion to income
-different policies have different VSLs
-low values can hinder safety improvements
-human life is priceless
-methods other than CBA should be used when policies affect mortality
What is Risk
Variability/Randomness that can be quantified
All potential outcomes are KNOWN or can be estimated
Can be incorporated in CBA
What is Uncertainty
Variability/Randomness that CANNOT be accurately quantified
Cannot be incorporated into CBA
What is Expected Value
The weighted average of potential values
EV = P x NB
P=probability outcome will occur
NB=Net benefit of outcome
What is Risk Aversion
Tendency to avoid risky situations
What is Precautionary Principle in CBA
Policies should account for uncertainty by taking steps to avoid low probability but catastrophic events
When impacts are IRREVERSIBLE
What is Safe Minimum Standard
Environmental policies on issues involving uncertainty should be set to avoid possible catastrophic consequences
When essential systems could suffer irreversible damage
What is a Benefit Transfer
practice of using existing studies to obtain estimate for new situation
What are the Pros of Benefit Transfer
-hard to estimate monetary value for things that don’t exist yet-use existing study
-CBAs can be time consuming
What are the Cons of Benefit Transfer
-comparing 2 different risks
-can have high errors
How to reduce errors of Benefit Transfers
-consider quality of studies
-collect evidence from multiple studies
What is the Net Present Value
Present value of Benefits - Present value of costs
(takes Discount rate into account)
What is Economically Efficient
Benefit > Cost
What is Sensitivity Analysis
Considers whether recommendation changes when we change some assumptions
Tests how robust results are to changes in assumptions
What changes are commonly tested in Sensitivity Analysis
-Discount Rate
-Risk Aversion
What are 2 Alternatives to Cost Benefit Analysis
1) Cost-Effectiveness Analysis
2) Positional Analysis
What is Cost-Effectiveness Analysis
Determines least cost way of achieving policy goal
What is Positional Analysis
Does not reduce all impacts to monetary terms
Combines Economic Valuation with:
Equity
individual rights
social priorities
