Unit 4: Trade Off Analysis: Ch.7

Question 1

What is Cost-Benefit Analysis

Answer 1

Measure all costs and benefits of a proposed project/policy in monetary terms

Question 2

What are the steps of a Cost-Benefit Analysis

Answer 2

• 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

Question 3

What are the Cons of a Cost-Benefit Analysis

Answer 3

-Difficult to estimate nonmarket value impacts
-Does not tell us about the C/B across society

Question 4

What are the 2 ways Cost-Benefit analysis is presented

Answer 4

1) NET BENEFITS: Total Benefits - Total Costs: if Negative = Costs > Benefits
2) BENEFIT-COST RATIO: Total benefits/ total costs
Ratio < 1 = Costs > Benefits

Question 5

What are Real/ Inflation Adjusted Dollars

Answer 5

Monetary estimates that account for changes in price levels over time

Question 6

What is Discounting

Answer 6

Costs and Benefits in the future should be assigned less weight relative to current costs and benefits

Question 7

How does Discounting look at the future

Answer 7

Devalues impacts in the future as less relevant than the impact now
The further out in time/ or higher discount rate = Lower Present Value

Question 8

What is the Present Value

Answer 8

Current value of future C/B

Question 9

What is Discount Rate

Answer 9

Annual rate at which future benefits or costs are discounted relative to current benefits or costs

Question 10

What is a Higher discount rate in relation to the future

Answer 10

Less value in the future

Question 11

What is a longer time horizon in relation to value

Answer 11

Less value in the future

Question 12

What is the relationship b/w Discount rates and Future Impacts

Answer 12

Discount rates make future impacts in the future irrelevant
Not worth it to look at future damage

Question 13

How does a High Discount Rate look at future

Answer 13

Favours Present over future

Question 14

How does a Low Discount Rate look at future

Answer 14

Greater weight to Future costs

Question 15

How are Discount Rates Chosen

Answer 15

1) Set it to equal rate of return on low risk investment (Gvt bonds)
2) Social Discount Rate: appropriate social valuation of the future

Question 16

What is the Pure Rate of Time Preference

Answer 16

Humans prefer present over future

Question 17

What is Contigent Valuation

Answer 17

Asks people their willingness to pay for enviromental benefits across time scales

Question 18

What is Value of Statistical Life

Answer 18

How much society is willing to pay to prevent one death from environmental pollution

Question 19

What is Value of Statistical Life based on

Answer 19

1) Contingent Valuation
2) Wage Risk Analysis

Question 20

What is Wage Risk Analysis

Answer 20

the required compensation needed to entice people to high-risk jobs: estimates value of statistical life

Question 21

What are some critiques of Value of Statistical Life

Answer 21

-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

Question 22

What is Risk

Answer 22

Variability/Randomness that can be quantified
All potential outcomes are KNOWN or can be estimated
Can be incorporated in CBA

Question 23

What is Uncertainty

Answer 23

Variability/Randomness that CANNOT be accurately quantified
Cannot be incorporated into CBA

Question 24

What is Expected Value

Answer 24

The weighted average of potential values
EV = P x NB
P=probability outcome will occur
NB=Net benefit of outcome

Question 25

What is Risk Aversion

Answer 25

Tendency to avoid risky situations

Question 26

What is Precautionary Principle in CBA

Answer 26

Policies should account for uncertainty by taking steps to avoid low probability but catastrophic events
When impacts are IRREVERSIBLE

Question 27

What is Safe Minimum Standard

Answer 27

Environmental policies on issues involving uncertainty should be set to avoid possible catastrophic consequences
When essential systems could suffer irreversible damage

Question 28

What is a Benefit Transfer

Answer 28

practice of using existing studies to obtain estimate for new situation

Question 29

What are the Pros of Benefit Transfer

Answer 29

-hard to estimate monetary value for things that don’t exist yet-use existing study
-CBAs can be time consuming

Question 30

What are the Cons of Benefit Transfer

Answer 30

-comparing 2 different risks
-can have high errors

Question 31

How to reduce errors of Benefit Transfers

Answer 31

-consider quality of studies
-collect evidence from multiple studies

Question 32

What is the Net Present Value

Answer 32

Present value of Benefits - Present value of costs
(takes Discount rate into account)

Question 33

What is Economically Efficient

Answer 33

Benefit > Cost

Question 34

What is Sensitivity Analysis

Answer 34

Considers whether recommendation changes when we change some assumptions
Tests how robust results are to changes in assumptions

Question 35

What changes are commonly tested in Sensitivity Analysis

Answer 35

-Discount Rate
-Risk Aversion

Question 36

What are 2 Alternatives to Cost Benefit Analysis

Answer 36

1) Cost-Effectiveness Analysis
2) Positional Analysis

Question 37

What is Cost-Effectiveness Analysis

Answer 37

Determines least cost way of achieving policy goal

Question 38

What is Positional Analysis

Answer 38

Does not reduce all impacts to monetary terms
Combines Economic Valuation with:
Equity
individual rights
social priorities