Unit 4: Trade Off Analysis: Ch.7 Flashcards

1
Q

What is Cost-Benefit Analysis

A

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

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2
Q

What are the steps of a Cost-Benefit Analysis

A
  • 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
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3
Q

What are the Cons of a Cost-Benefit Analysis

A

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

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4
Q

What are the 2 ways Cost-Benefit analysis is presented

A

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

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5
Q

What are Real/ Inflation Adjusted Dollars

A

Monetary estimates that account for changes in price levels over time

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6
Q

What is Discounting

A

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

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7
Q

How does Discounting look at the future

A

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

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8
Q

What is the Present Value

A

Current value of future C/B

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9
Q

What is Discount Rate

A

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

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10
Q

What is a Higher discount rate in relation to the future

A

Less value in the future

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11
Q

What is a longer time horizon in relation to value

A

Less value in the future

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12
Q

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

A

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

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13
Q

How does a High Discount Rate look at future

A

Favours Present over future

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14
Q

How does a Low Discount Rate look at future

A

Greater weight to Future costs

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15
Q

How are Discount Rates Chosen

A

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

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16
Q

What is the Pure Rate of Time Preference

A

Humans prefer present over future

17
Q

What is Contigent Valuation

A

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

18
Q

What is Value of Statistical Life

A

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

19
Q

What is Value of Statistical Life based on

A

1) Contingent Valuation
2) Wage Risk Analysis

20
Q

What is Wage Risk Analysis

A

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

21
Q

What are some critiques of Value of Statistical Life

A

-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

22
Q

What is Risk

A

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

23
Q

What is Uncertainty

A

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

24
Q

What is Expected Value

A

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

25
Q

What is Risk Aversion

A

Tendency to avoid risky situations

26
Q

What is Precautionary Principle in CBA

A

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

27
Q

What is Safe Minimum Standard

A

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

28
Q

What is a Benefit Transfer

A

practice of using existing studies to obtain estimate for new situation

29
Q

What are the Pros of Benefit Transfer

A

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

30
Q

What are the Cons of Benefit Transfer

A

-comparing 2 different risks
-can have high errors

31
Q

How to reduce errors of Benefit Transfers

A

-consider quality of studies
-collect evidence from multiple studies

32
Q

What is the Net Present Value

A

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

33
Q

What is Economically Efficient

A

Benefit > Cost

34
Q

What is Sensitivity Analysis

A

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

35
Q

What changes are commonly tested in Sensitivity Analysis

A

-Discount Rate
-Risk Aversion

36
Q

What are 2 Alternatives to Cost Benefit Analysis

A

1) Cost-Effectiveness Analysis
2) Positional Analysis

37
Q

What is Cost-Effectiveness Analysis

A

Determines least cost way of achieving policy goal

38
Q

What is Positional Analysis

A

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