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The Numéraire Matters in Cost-Benefit Analysis
Abstract
Cost-effectiveness analysis, which ranks projects by quality adjusted life years gained per dollar spent, is widely used in the evaluation of health interventions. We show that cost effectiveness analysis can be derived from two axioms: society prefers Pareto improvements and society values discounted life years, lived in perfect health, equally for each person. These axioms generate a unique social preference ordering, allowing us to find the cost effectiveness threshold to which health projects should be funded, and to extend cost effectiveness analysis to give a consistent method of project evaluation across all sectors of the economy.
... Theoretically, the use of non-monetary numeraires in evaluations have long been noted to depend on whether good is question is a public good or private good (see e.g. Brekke, 1997;Dreze, 1998). Specifically, Brekke (1997) notes that the choice of num eraire matters in the evaluation of public goods provision but not in the purchase of private goods. ...
... Brekke, 1997;Dreze, 1998). Specifically, Brekke (1997) notes that the choice of num eraire matters in the evaluation of public goods provision but not in the purchase of private goods. This is because the choice of num eraires requires normalization of prices and marginal utility; and these normalizations make the choice of num eraires to matter for public goods but not for private goods (Brekke, 1997). ...
... Specifically, Brekke (1997) notes that the choice of num eraire matters in the evaluation of public goods provision but not in the purchase of private goods. This is because the choice of num eraires requires normalization of prices and marginal utility; and these normalizations make the choice of num eraires to matter for public goods but not for private goods (Brekke, 1997). In addition, Dreze (1998) assesses the consequences of num eraire for private goods, and notes that under market imperfections e.g. ...
An increasing number of stated preference studies adopt both monetary and non-monetary payment modes to elicit preferences for goods and services in developing and transition countries. The extent to which these alternative payment modes approximate the underlying human preferences for these goods and services is poorly understood. The circumstances under which monetary and non-monetary welfare measures can be combined for efficient estimation of welfare measures and to guide public resource allocation also remain unclear. In a split-sample design, we present a choice experiment on the purchase of flood insurance in which insurance premiums are paid in money, labour time and harvests. We use an integrated choice-modeling framework to test for differences in relative scale parameters among these three alternative payment modes. We find that the relative scale parameters for non-monetary payment modes are lower than the relative scale for monetary payment mode. We argue that the two non-monetary payment modes exhibit higher degrees of uncertainties in the choice experiment. We discuss possible causes and the implications of these results for the design of stated preference studies and the use of resulting welfare measures in cost-benefit analyses.
... The confusion with the numéraire comes from the issue of how perfect of a sign any given numéraire is. Brekke's (1997) paper illustrates the numéraire confusion with a simple example. There are two individuals, each with a different utility function. ...
... The result further suggests that the regular use of money as the numéraire may lead to analysis consistently biased in the same direction. Brekke's (1997) result can be addressed by making the numéraire a more perfect sign for social welfare. This greater perfection is achieved by using distributional weights to count some units of money (or other numéraire) more than others. ...
... Under the present paper's nomenclature, intuitive balancing could be a form of intrinsic value-based CBA It should be noted that Adler and Posner's interpretation of 'cost benefit analysis', though quite commonplace, is actually more narrow than the formal CBA literature, because it omits social welfare-based CBAs that are conducted in non-monetary numéraires. So for example, Brekke's (1997) analysis with a numéraire of environmental units would not qualify as a CBA. ...
Cost-benefit analysis (CBA) evaluates actions in terms of negative consequences (costs) and positive consequences (benefits). Though much has been said on CBA, little attention has been paid to the types of values held by costs and benefits. This paper introduces a simple typology of values in CBA and applies it to three forms of CBA: the common, money-based CBA, CBA based in social welfare, and CBA based in intrinsic value. The latter extends CBA beyond its usual anthropocentric domain. Adequate handling of value typology in CBA avoids analytical mistakes and connects CBA to its consequentialist roots.
... The message is that, for a developing world where population is increasing at a rate higher than the developed world, the per capita utility discount rate should be smaller. The third term expresses the decreasing marginal welfare of utility, also appearing in the discount rate in the utility term 5 . For the case of classical utilitarianism (α = 0), one unit of increase in utility in any region would amount to one unit of social welfare at that moment, so that the third term disappears. ...
... The partial derivative with regard to α is justu/u, since the parameter α only appears as the coefficient of the utility growth rate in (5). Note also that the effect of α and β on the discount rates of i is symmetric if 0 < α, β < 1. ...
... See Lomborg (2008) for a similar non-technical argument.3 The simultaneous consideration of income or consumption and the environment could be seen as a dynamic extension ofBrekke (1997), who illustrated that the environment as a public good leads to different willingness-to-pay values for different individuals, demonstrating the importance of the choice of a numéraire in a cost-benefit analysis. Our model echoes this last point, but is placed in a dynamic context on the rich and the poor, thus arousing the tension between intertemporal versus intratemporal equity, in contrast to a static economy of a materialist and an environmentalist as modeled inBrekke (1997). ...
To consider the implications of disaggregated consumption and discounting in the context of climate change, we study discounting in a world composed of the rich and the poor; a standard setting in the literature of cost–benefit analysis with distributional considerations. We derive several discount rates for different numéraires, which allow us to discuss intergenerational and intragenerational equity in common terms. In the example of CES-CRRA utility, we also show that disaggregated discount rates may vary owing to several factors. One important parameter, inequality aversion, can be determined in the weighting of intergenerational and intragenerational concerns.
... Although nonmonetary unit of measurement is gaining wider acceptance, disagreements can also be found. Several disagreements include the following: (1) Using different units of measurement will result in different values [19], (2) nonmonetary unit of measurement is difficult to convert to utility which may make aggregation difficult [20], and (3) different numeraires favor to different groups of people [19]. In response to the critiques, the proponents of using nonmonetary units argue that it is not about choice of numeraire that matters. ...
... Although nonmonetary unit of measurement is gaining wider acceptance, disagreements can also be found. Several disagreements include the following: (1) Using different units of measurement will result in different values [19], (2) nonmonetary unit of measurement is difficult to convert to utility which may make aggregation difficult [20], and (3) different numeraires favor to different groups of people [19]. In response to the critiques, the proponents of using nonmonetary units argue that it is not about choice of numeraire that matters. ...
Contingent valuation method (CVM) is widely applied to value environmental goods and services. Initially developed in developed countries, CVM now is also widely applied in developing countries. However, in many cases, value estimates from CVM studies carried out in developing countries are smaller than expectations. One possible explanation for this phenomenon is that people in developing countries may have different preferences toward environmental goods and services. Another explanation argues that it is effect of poverty on the valuation, i.e., effect of limited income instead of deficiencies in preferences. A suggestion to resolve the problem according to the latter argument is by using nonmonetary contribution as payment vehicle. Following this argument, this paper reports result of CVM surveys using working time without pay (or called willingness to work, WTW) in addition to standard monetary contribution (or called willingness to pay, WTP) implemented for a contingent scenario to avoid deforestation and forest degradation in Segah watershed in Berau District, East Kalimantan, Indonesia. Both WTP and WTW are elicited in open-ended format, i.e., directly asking respondents about their maximum contributions for the proposed program. Results show that in terms of WTP, respondents’ average benefit from the proposed project is Rp124,088 for onetime payment, whereas average WTW is 20.25 days per year. When WTW is converted to WTP using casual daily wage, it turns out that WTW is 8.15 times higher than WTP. The results confirm findings of previous studies that value estimated in terms of WTW is substantially higher than WTP. In addition, among similar sets of socioeconomic and forest use variables, variables of income, gender, family having baby, living in mixed tribe villages, and extent of using river services are significant determinants for WTP, whereas migration, living in mixed tribe villages, extent of using forests, practicing ritual related to forests, having gardens located in forests, and belief in the scenario applicability are significant determinants for WTW. Although determinants of the WTP and WTW are found to be different, in general the variables exhibit expected signs, which shows validity of the model. Therefore, the finding supports for using nonmonetary contribution for CVM study implemented in developing countries, especially in community with limited cash income.
... This case, however, is unrealistic and di¢cult to justify empirically. The WTP approach has then been intensively criticized by many scholars in publics economics and environmental economics (Boadway, 1982, Drèze and Stern, 1987, Blackorby and Donaldson, 1990, Brekke, 1997, Drèze, 1998. Despite the numerous criticisms, we have not found any analysis that investigates the welfare distortions created by the WTP approach. ...
... We think that this is a quite modest di¤erence compared to the various other sources of misestimation (see for instance Diamond and Hausman, 1994). Furthermore, remember that the main di¤erence is due to wealth heterogeneity across the population, and that we have considered a uniform taxation scheme (as in Wilson, 1991; see also Brekke, 1997). Hence, the use of this extreme form of taxation presumably provides an upper bound for the misestimation, as e.g. ...
The Willingness-to-Pay approach is the basic justification for the use of the Contingent Valuation method to evaluate public mortality risk reduction programs. However, aggregating unweighted willingness-to-pay is a valid method only when individuals have the same marginal value of money, an unrealistic assumption in the presence of heterogeneity. We show that heterogeneity on wealth and baseline risk (respectively on risk reduction) leads to systematically overestimate (respectively underestimate) the social value of a risk reduction program. Using a recently published Contingent Valuation analysis, we find this overestimation to be quite modest though, approximately 15% in an upper bound case.
... To exemplify, in disadvantaged communities, individuals with limited financial resources may struggle to express their preferences through high WTP, potentially giving disproportionate weight to the preferences of wealthier groups. This situation can raise environmental justice concerns, as decisions based solely on WTP then implicitly underweight the priorities of less affluent residents (e.g., Ref. [50]), due to their expected higher marginal utility of money [51]. ...
Nature-based solutions have gained recognition as viable strategies for climate adaptation, particularly in urban areas to reduce flooding. One solution to improve flood management is opening up streams in residential areas, reversing the historical practice of channeling streams into underground pipes. In a contingent valuation survey, we examine local residents' preferences for reopening a stream. We assess residents' willingness to pay (WTP) for two distinct reopening plans: one embracing a green and natural solution, and the other adopting a grey and urban solution. The results reveal a strong preference for the nature-based stream, underscoring the significance of community engagement when developing flood management strategies. The elicited WTP estimates for the nature-based stream highlight significant nonmarket benefits to the community, amounting to a present value of approximately NOK 11.5 million. Prioritizing such nature-based solutions could enhance local welfare and align with local preferences. However, the costs associated with developing the nature-based stream are high, and the elicited nonmarket benefits do not exceed these costs. This conclusion should be interpreted with caution, given limitations of the study. Further research is needed to establish whether similar projects would pass the benefit-cost test.
... 13. Brekke (1997). The author argues that in the valuing of public goods, the choice of money as numeraire is systematically favorable to those who value money the least, relative to alternative numeraires. ...
In this paper we show how two seemingly irrelevant accounting principles for central banks—namely, the choice of the unit of account for its balance sheet and the method of inventory valuation of foreign currency reserves—can overstate or understate profits transferred to the treasury and how this can threaten the ability of central banks to control inflation. We show the first point through Monte Carlo experiments calibrated for the Venezuelan economy and the second point in an infinitely lived representative agent model that illustrates the problem of the joint determination of the level of central bank assets and the size of profits transferred to the treasury when the objective of the central bank is to eliminate the possibility of hyperinflation. JEL Codes: E58, E31
... En términos económicos, el agua es un bien esencial, por lo que el valor (disposición a pagar) por una canti-2. Un ejemplo del potencial de efectos con diferentes opciones para el numerario puede encontrarse en Brekke, K. A. (1997). ...
Se sintetiza a modo de memorias del IV Foro sobre Servicios Ecosistémicos relaiazado por el Grupo Interinstitucional de Trabajo sobre Servicios Ecosistemicos, coordinado por el IICA. Se presentan y discuten los avances en el conocimiento e investigación sobre Servicios ecosistémicos.
... 706-711). 12 Numéraire denotes a (theoretical or actual) good that is used in an economic model to denote the values of other goods (e.g., Brekke 1997). In this case, the representative agent resigns from the consumption of numéraire (interpreted as all other goods) in exchange for using more expensive mean or transportation or commuting more often. ...
... Iš visų šių išvardintų metodų socialinės ir ekonominės naudos įvertinimui dažniausiai taikomi CBA ir MCDA (Brekke 1997). Nors abu išskirti metodai remiasi kiekybiniais vertinimo būdais, tačiau, jeigu CBA metodas pirmenybę teikia monetariniam vertinimui, tai MCDA -balams ir svoriams. ...
... From their first introductory course, economists are taught the law of diminishing marginal utility as a golden rule, only to see it forgotten later when applying the ABC. Without adjusting or "weighting" monetary welfare changes to take into account the social marginal utility of money, CBA is systematically favorable to those who value money the least relative to alternative numeraires (Brekke, 1997;Dreze, 1998;Boadway, 2006). The reason for this is that, due to the diminishing marginal utility of money, the rich are usually willing to give up more of their income for a given (equally desirable) change and thus their opinion matters more in the social decision-making. ...
Cost-benefit analysis (CBA) is built on the Kaldor-Hicks efficiency criterion whereby projects that have aggregate positive net benefits are recommended even if those who lose are not compensated for their losses. Two kinds of problems can be identified with the use of the criterion. First, as income tends to affect monetary welfare changes positively, the preferences of those with higher wealth have a larger weight in societal decision-making. Second, monetary welfare changes can be thought of as changes in real income, which matter more for those with a lower initial wealth level. Both problems can be mitigated with distributional weighting. Despite their strong theoretical pedigree, distributional weights have been largely neglected in practical CBAs, one exception being analyses in climate change economics. We present the theory of distributional weighting and illustrate how weights can be applied empirically in an international environmental CBA that deals with marine water quality improvements. We show that different weighting schemes can result in different policy recommendations. We also show that taking the income distribution within countries into account can change a country's willingness to participate in the water quality improvement program and that the income elasticity of willingness to pay (WTP) is an important indication of the direction of change.
Available: https://authors.elsevier.com/a/1WyCB3Hb~0Elcw
... It is well-known that choosing either money or health as the numeraire does matter in an approach without distributional weights. The choice becomes irrelevant, however, as soon as one works within a coherent SWF-framework -see, e.g., the exchange of ideas betweenBrekke (1997), Drèze (1998) andJohansson (1998). ...
We evaluate the introduction of various forms of antihypertensive treatments in France with a distribution-sensitive cost-benefit analysis. Compared to traditional cost-benefit analysis, we implement distributional weighting based on equivalent incomes, a new concept of individual well-being that does respect individual preferences but is not subjectively welfarist. Individual preferences are estimated on the basis of a contingent valuation question, introduced into a representative survey of the French population. Compared to traditional cost-effectiveness analysis in health technology assessment, we show that it is feasible to go beyond a narrow evaluation of health outcomes while still fully exploiting the sophistication of medical information. Sensitivity analysis illustrates the relevancy of this richer welfare framework, the importance of the distinction between an ex ante and an ex post approach, and the need to consider distributional effects in a broader institutional setting.
... Eq. (5) shows that in this example y * i < y * j and therefore the same individual loss will have a smaller negative effect on social welfare for the rich individual j than for the poor individual i. 4 4 It is well-known that choosing either money or health as the numeraire does matter in an approach without distributional weights. The choice becomes irrelevant, however, as soon as one works within a coherent SWF-framework -see, e.g., the exchange of ideas between Brekke (1997), Drèze (1998) and Johansson (1998). Some mathematics clearly illustrate the point. ...
We evaluate the introduction of various forms of antihypertensive treatment in France with a distribution-sensitive cost-benefit analysis. Compared to traditional cost-benefit analysis, we implement distributional weighting based on equivalent incomes, a new concept of individual well-being that does respect individual preferences but is not subjectively welfarist. Individual preferences are estimated on the basis of a contingent valuation question, introduced into a representative survey of the French population. Compared to traditional cost-effectiveness analysis in health technology assessment, we show that it is practically feasible to go beyond a narrow evaluation of health outcomes while still fully exploiting the technical sophistication of medical information. Sensitivity analysis illustrates the relevancy of this richer welfare framework, the importance of the distinction between an ex ante and an ex post-approach, and the need to consider distributional effects in a broader institutional setting.
... Ši funkcija nebūtinai yra tiesinė. Brekke (1997) pateikia naudingumo funkcijos skaičiavimo nesutapimų pavyzdį, kai atliekamas veiksmas yra materialiai nuostolingas, o iš aplinkosaugos elementų yra sukuriama didelė vertė. Panaši situacija gali susidaryti ir vėjo energetikos projektams -jie gali būti teigiamai vertinami iš aplinkosaugos ir darnaus vystymosi pozicijų, tačiau dėl didelės energijos kainos sulaukti neigiamo vartotojų požiūrio. ...
Last decade as prices of fossil energy resources were almost constantly going upwards, increasing flow of investments is directed to renewable energy resources. Development and application of green energy became one of priority objectives in many countries. While in the context of wind energy production Lithuania lags behind the EU average, its potential of wind energy usage has great perspective. In this article using random processes, cost-benefit and financial analysis, attractiveness of investment in wind energy projects is examined. Given the stochastic nature of wind energy and by looking into investment profitableness and risk factors, effectiveness of wind turbine is evaluated. Analysis showed that wind energy projects could be considered as having high profit-to-risk factor and should generate significant interest of investment community.
Article in: Lithuanian
Article published: 2012-07-09
... För att bedöma åtgärders samhälleliga önskvärdhet brukar ekonomer försöka mäta alla konsekvenser av en åtgärd i en och samma enhet, pengar (i litteraturen diskuteras ibland möjligheterna och konsekvenserna av att använda andra enheter, se till exempel Brekke, 1997). Om vi i exemplet i tabell 6 ovan antar att vi värderar minskningarna av CO 2 e och SO 2 ekonomiskt kan vi direkt jämföra utsläppsminskningarnas (nyttornas) ekonomiska värde med kostnaderna för åtgärden. ...
... When expressed -totally or partially -in money terms, necessary compensation has to be large for people who value money the less (low α i ) (Brekke, 1997). Under regimes 1 and 2, individuals with α i = α do not support any individual welfare variations whereas inviduals with α i < α incur a loss of welfare decreasing with α i and n and individuals with a α i > α benefit from a gain of welfare. ...
This paper examines a situation where a decision-maker determines the appropriate compensation for a given ecological damage. We con-sider that the policy-maker can use either or both money and natural units to meet three goals: i) no aggregate welfare loss, ii) minimization of the cost associated with the compensation, iii) minimal environmen-tal compensation requirement. We provide a simple two-period model to analyze the problem faced by the decision-maker. The findings suggest that -in some cases -pro-viding both monetary and natural compensation can be the best op-tion. Some comparative statics and welfare implications are analyzed.
... Pour le sujet qui nous intéresse, une première cause de non neutralité tient à la dimension « bien public » de l'environnement. On sait qu'avec ce genre de bien, le choix du numéraire peut avoir pour conséquence de retenir les projets publics qui avantagent systématiquement certains groupes sociaux (Brekke, 1997). ...
L'objectif de cette note est de présenter et d’articuler quelques analyses pionnières sur cette question d’incommensurabilité – menées en économie ou dans d’autres disciplines - et ce faisant de proposer un éclairage sur la pertinence (et les limites) de la pratique qui consiste à mettre des prix sur l’environnement. En quoi les contraintes sur la nature remettent-elles en cause la façon traditionnelle de penser la rationalité des choix et l’évaluation ? Et, pour ces situations de tension, sans doute appelées à devenir plus fréquentes, quelles perspectives de recherche est-il souhaitable d’envisager ?
La section 1 rappelle d’abord brièvement les fondements conceptuels de l’évaluation économique. Dans ce cadre, la section 2 s’efforce de préciser le sens de l’objection d’incommensurabilité. La section 3 explique en quoi la monétarisation de la nature est moins neutre que certains voudraient le croire. La section 4 résume quelques résultats empiriques récents en sciences du comportement sur la façon dont les individus réagissent face à des choix qui touchent au sacré. La section 5 conclut.
... non-marginal changes, public goods, externalities are indeed pervasive (see Brekke 1997, Holland 1995, Laslett 1995), ...
In chapter 2, we tried to show that “voting”, although being a familiar activity to almost everyone, raises many important
and difficult questions that are closely connected to the subject of this book. Our main objective in this chapter is similar.
We all share the — more or less pleasant — experience of having received “grades” in order to evaluate our academic performances.
The authors of this book spend part of their time evaluating the performance of students through grading several kinds of
work, an activity that you may also be familiar with. The purpose of this chapter is to build upon this shared experience.
This will allow us to discuss, based on simple and familiar situations, what is meant by “evaluating a performance” and “aggregating
evaluations”, both activities being central to most evaluation and decision models. Although the entire chapter is based on
the example of grading students, it should be stressed that “grades” are often used in contexts unrelated to the evaluation
of the performance of students: employees are often graded by their employers, products are routinely tested and graded by
consumer organisations, experts are used to rate the feasibility or the riskiness of projects, etc. The findings of this chapter
are therefore not limited to the realm of a classroom.
... However, while resource compensation addresses the impacts in total, it does not address the distribution of impacts. Such distributional impacts have been identified as a difficulty in resource compensation exercises or indeed in any form of benefit cost analysis that does not use money as the numeraire (Brekke 1997). ...
Assessing the impacts of forest harvesting activities on Aboriginal people and incorporating these considerations into forest management plans is one of the chal- lenges facing Canadian forest managers. In this study, we model hunting behavior using stated and revealed preference data on subsistence use of wildlife resources. We use this framework to assess the impacts of forest management changes on Aboriginal people in northwestern Saskatchewan. Innovative approaches to data collection are employed to address challenges in obtaining data in these contexts. The econometric analysis combines the stated and revealed preference information to account for limitations in the revealed preference data. Monetary measures of welfare are examined, but we also assess resource compensation and zoning as mechanisms for addressing the impact of forest harvesting on subsistence wildlife use. The results also demonstrate the use of geographic informa- tion system information in linking forest management and Aboriginal resource use. FOR. SCI. 50(2):139 -152.
... It finds potential welfare gains for a lump-sum redistribution of income. And, as Johansson (1998) observes, this leaves us with no reliable way of separating the efficiency and equity effects in project evaluation. We show the paradox is avoided by allowing relative prices to change in the compensated equilibrium. ...
... Our extension of cost effectiveness for project appraisal outside the health sector has some parallels in the literature. Equation (42) can also be regarded as a form of weighted cost benefit analysis where we weight each person's willingness to pay in money terms to take account of distributional concerns (Harberger (1978), Brent (1984)). Brekke (1997) The cost benefit analysis we have set out has several advantages over the standard approach. We do not get preference reversals and the rule is transitive. However, the question of whether we prefer existing cost benefit or our new approach is essentially an ethical one. Does society think additional money is equally valuable to each pe ...
We show that individual utilities can be measured in units of healthy life years. Social preferences over these life metric utilities are assumed to satisfy the Pareto principle, anonymity, and invariance to a change in origin. These axioms generate a utilitarian social welfare function implying the use of cost-effectiveness analysis in ordering health projects, based on maximizing the healthy years equivalents gained from a fixed health budget. For projects outside the health sector, our cost-effectiveness axioms imply a form of cost-benefit analysis where both costs and benefits are measured in equivalent healthy life years. Copyright © 2013 John Wiley & Sons, Ltd.
... Brekke's [1997] discussion of the influence of the numeraire is a notable exception. He discusses how the numeraire can influence judgments about the merits of programs providing public goods when individuals' preferences are heterogeneous in their evaluations of non-traded goods. ...
... However, the presence of the distributional parameters β i in (2) plays a crucial role in this interpretation. As was made clear in the exchange of ideas between Brekke (1997), Drèze (1998) and Johansson (1998), the choice of numeraire may matter if one uses an unweighted sum of net benefits as the criterion for project evaluation. Suppose one has to choose between financing two equally costly treatments which have a similar effect on the health status (calculated in terms of the number of QALY's) of the individuals concerned. ...
We argue that the economic evaluation of health care (cost-benefit analysis) should respect individual preferences and should incorporate distributional considerations. Relying on individual preferences does not imply subjective welfarism. We propose a particular non-welfarist approach, based on the concept of equivalent income, and show how it helps to define distributional weights. We illustrate the feasibility of our approach with empirical results from a pilot survey. Copyright © 2012 John Wiley & Sons, Ltd.
... Application of the value judgement that individual preferences should count and the ensuing proposition that a decision that reflects individual's preferences is a good decision are not always legitimate. Use of other numeraire such as emission load has been proposed by Brekke (1997) in order to overcome such biases. Learning from other disciplines has also been suggested. ...
The objective of the paper is to estimate environmental externalities related to a run of river project in Sri Lanka and to investigate inequity in distribution of impacts among different social groups. Diversion of the river resulted in loss of water sports (for high-income groups both local and remote), loss of historical monuments (for remote high-income groups) and recreation losses (for local poor). Removal of forest cover leads to loss of non-timber products (for local poor) and carbon storage (for remote high- and low-income groups). Loss of home garden productivity was borne by local poor groups. Benefit of the project, generation of 145 GWh annually, was a gain for the grid connected groups. The impacts were valued using various valuation methods. The base case of the cost benefit analysis resulted in NPV of US$ 11,335,730. When distributional weights are applied for different income groups, both the sign and magnitude of net benefits change. In order to be viable, the project needs diversion of at least 9% of generated electricity to the poorest households in the country. Implications for energy policy towards reducing externality and inequality impacts are also discussed.
Distributional weighting to address concerns about diminishing marginal utility of income in benefit–cost analysis has been the topic of increased interest in recent years. Concern has been expressed about the practicability of distributional weighting, given limitations on data and on the analytical capacities of agencies. This paper contributes to a small but growing literature that attempts to provide guidance and real‐world examples of distributional weighting. We develop a methodology for calculating what we call ‘population weights’, which, once computed for a given population by an analyst, can be used by other analysts to implement distributional weighting on similar populations, without those analysts needing information on income distribution or the cost or benefit experienced by households at different income levels within those populations. These population weights can be calculated without knowing the costs or benefits received by households at different income levels, using proxies for cost or benefit that may be observable or about which, in the absence of data, assumptions can be made in some cases. We implement the methodology on an example regulation and present results that we believe provide useful information to decision‐makers, even in the absence of estimates of unweighted costs and benefits.
Land use change is the main driver of nature and biodiversity loss worldwide, and tourism developments contribute to this loss. The combination of Cost-benefit analysis (CBA) and Stated Preference (SP) methods can help inform tourism management by translating the environmental and economic impacts of developments into welfare impacts in monetary terms. We perform a CBA at both the local and regional levels for small (S), medium (M), and large (L) developments in a certified sustainable mountain destination in Norway. The L-development is the preferred tourism management locally as local economic benefits outweigh the local environmental costs. However, when we also include the economic and environmental impacts outside of the destination, we find the S-development to provide higher total welfare at the regional level. This shows that local governments’ dual role as regulators and promoters of tourism is problematic since sustainable management should also account for the nonmarket environmental welfare impacts outside of the destination.
Revealed and stated preference techniques are widely used to assess willingness to pay (WTP) for non-market goods as input to public and private decision-making. However, individuals first have to satisfy subsistence needs through market good consumption, which affects their ability to pay. We provide a methodological framework and derive a simple ex post adjustment factor to account for this effect. We quantify its impacts on the WTP for non-market goods and the ranking of projects theoretically, numerically and empirically. This confirms that non-adjusted WTP tends to be plutocratic: the views of the richest – whatever they are – are more likely to impact decision-making, potentially leading to ranking reversal between projects. We also suggest that the subsistence needs-based adjustment factor we propose has a role to play in value transfer procedures. The overall goal is a better representation of the entire population’s preferences with regard to non-market goods.
Federal discount rate policies advocate both a high rate representing the marginal productivity of capital and a low rate representing the government borrowing rate. These differential discount rate policies could be inconsistent and biased in favor of projects on which the lower discount rate is applied. This paper shows that the coexistence of different discount rates may be appropriate, depending on the type of project output. When a project's outputs are perfect substitutes for private consumption, both its costs and benefits should be discounted using the marginal productivity of capital. However, if the project's outputs are separable in the utility function, the benefits should be discounted using the net (of tax) rate of return.
Benefit–cost analysis (BCA) is often viewed as measuring the efficiency of a policy independent of the distribution of its consequences. The role of distributional effects on policy choice is disputed; either: ( a ) the policy that maximizes net benefits should be selected and distributional concerns should be addressed through other measures, such as tax and transfer programs or ( b ) BCA should be supplemented with distributional analysis and decision-makers should weigh efficiency and distribution in policy choice. The separation of efficiency and distribution is misleading. The measure of efficiency depends on the numéraire chosen for the analysis, whether monetary values or some other good (unless individuals have the same rates of substitution between them). The choice of numéraire is not neutral; it can affect the ranking of policies by calculated net benefits. Alternative evaluation methods, such as BCA using a different numéraire , weighted BCA, or a social welfare function (SWF), may better integrate concerns about distribution and efficiency. The most appropriate numéraire , distributional weights, or SWFs cannot be measured or statistically estimated; it is a normative choice.
This thesis applies cost-benefit analysis (CBA) to certain environmental questions and through its results contributes to both the theoretical literature on CBA in environmental economics and practical issues in the application of CBA to environmental problems. The work comprises an introduction and four articles, which address three common thematic areas: 1) distributional issues, 2) climate change adaptation, and 3) urban ecosystem services.
Cette thèse s’inscrit dans le débat scientifique actuel autour de l’évaluation économique des services écosystémiques fournis par les aires marines protégées (AMP) dans les pays en voie de développement. Appliquant la méthode de l’évaluation contingente, elle s’est intéressée à l’analyse de la perception de la population mauritanienne des services écosystémiques fournis par l’aire marine protégée du parc national du banc d’arguin (PNBA) en Mauritanie et la valeur qu’elle consente à payer pour maintenir l’offre de ces services dans son état actuel. A travers l’analyse des résultats de trois enquêtes réalisées au PNBA (niveau local), à Nouakchott (zone adjacente) et à Tidjikja (arrière-pays), la thèse discute l’impact de la distance, dans le sens de l’éloignement et du temps nécessaire pour accéder à l’AMP, tant sur la perception des services écosystémiques fournis par le PNBA que sur le consentement à payer pour sa conservation. Par ailleurs, elle aborde l’applicabilité de la méthode de l’évaluation contingente dans les pays en voie de développement et propose quelques améliorations du protocole de l’enquête pour améliorer la fiabilité des résultats.
In order to perform cost benefit analysis for risk management purposes it is sometimes necessary to adopt a benchmark value for the loss of life. In risk management literature the economic valuation of loss of life is often depicted as a difficult question as it raises numerous ethical and moral questions. The actual investments in risk reduction are however always finite, indicating that the value attributed to loss of human life is finite. In this paper, an overview of methods for the valuation of human life is given. The backgrounds and basic assumptions of the different methods are discussed. Two distinct approaches are discussed: behavioural and non-behavioural valuation methods. Non-behavioural approaches can be divided into stated and revealed preference methods. The different approaches lead to distinctly different valuations of human life. For risk management purposes non-behavioural approaches are considered preferable over behavioural approaches. Only when considering investments in risk reduction can economic valuation of loss of life then be expected to have an impact on the outcome of the cost-benefit analysis. In societal cost-benefit analyses for hazardous activities that are intended to produce economic benefits it is proposed to present loss of life as a PM-item and to weigh it politically against net monetary effects.
With the costs of fossil fuel consistently rising worldwide over the last decade, the development of green technologies has become a major goal in many countries. Therefore the evaluation of wind power projects becomes a very important task. To estimate the value of the technologies based on renewable resources also means taking into consideration social, economic, environmental, and scientific value of such projects. This article deals with economic evaluation of electricity generation costs of onshore wind farms in Lithuania and the key factors that have influence on wind power projects and offer a better understanding of social-economic context behind wind power projects. To achieve these goals, this article makes use of empirical data of Lithuania’s wind power farms as well as data about the investment environment of the country.Based on empirical data of wind power parks, the research investigates the average wind farm generation efficiency in Lithuania. Employing statistical methods the return on investments of wind farms in Lithuania is calculated. The value created for every party involved and the total value of the wind farm is estimated according to Stakeholder theory.
What is the effect of a new infrastructure on the well-being of a local community? Is a tax reform desirable? Does the privatisation of a telecommunication provider increase social welfare? To answer these questions, governments and their policy advisors should have in mind an operative definition of social welfare, and cannot rely on simple official statistics, such as GDP. The prices we observe are often misleading as welfare signals, and costs and benefits for the society should be based on ‘shadow prices‘, revealing the social opportunity costs of goods and of changes in the world. This book explains how to apply these welfare economics ideas to the real world.
This paper provides an overview of the various aspects of trade, the environment, and related public issues and policies. It covers the pollution problem, the recent global warming trend, the world's various levels of institutional arrangements such as the UN, the WTO, regional, national, and other institutions in solving the global trade and environmental issues. A number of theoretical issues are explored. including market failure, the tragedy of the commons, the theory of second-best, the cap-and-trade system, relative efficacy of price vs. quantity instruments in emissions control, the optimal social discount rate, and the tradeoff between economic development and environmental quality. Several notable WTO environmental and health-related trade dispute cases are examined, including tuna-dolphin, shrimp-turtle, eco-labeling, beef-hormone, and the GMOs.
(Forthcoming in the Pacific Economic Review.)
A Football World Cup is a mega event with far-reaching socio-economic ef-fects. The hosting country should therefore perform public project evaluation. Applying cost-benefit analysis to the case of a Football World Cup 2006 in Germany raises the analytical problem of treating at once two types of national impact: one of nation-wide local investment in durable facilities (about ten stadiums) and the other of short-term con-sumption during the event. A portfolio technique to overcome this difficulty and solutions to specific data problems will be presented. We conclude with some political economic issues emerging from social efficiency implications of the aggregated results.
It is often argued that projects involving public good changes should be chosen on the basis of monetary valuation and cost–benefit analysis (CBA). However, CBA is not value-free. When used to measure welfare, it is based on highly controversial value judgements. When used to measure efficiency, it is based on assumptions of limited relevance to democratic decision-making processes. CBA measures total net willingness to pay, neither more nor less. While interesting in its own right, the normative significance of this indicator is not obvious.
This paper examines a situation in which a decision-maker determines the appropriate compensation that should be awarded for a given amount of ecological damage. The compensation can take the form of either or both monetary and environmental units to meet three goals: i) minimisation of the cost associated with the compensation, ii) no aggregate welfare loss, and iii) minimal environmental compensation requirement. The findings suggest that – in some cases – providing both monetary and environmental compensation can be the cost-minimising option. Minimal compensation constraints can increase total compensation costs but reduce individual gains and losses relative to the initial situation that arise from heterogeneous tradeoffs between income and environmental quality.
Consider the choices faced by those responsible for managing releases of water at the Glen Canyon Dam on the Colorado River.
The size and timing of the releases determine the value of the hydroelectric power generated. But the pattern of the releases
influences the nature and value of the recreational activities on Lake Powell above the dam and on the rivers in Glen Canyon
and Grand Canyon below the dam. The release patterns also affect, in complex ways, the availability of suitable habitat for
and the probabilities of the survival of several endangered species. Thus, managers face choices that involve tradeoffs.1 More hydroelectric power means reduced quality and quantity of recreation opportunities and, perhaps, reductions in the survival
of some endangered species. It is necessary to reconcile the sometimes conflicting desires and interests of those affected
by management decisions and to make wise choices concerning these trade-offs. To do so, resource managers require information
on the value of hydroelectric power and the values that people place on various attributes and types of recreation on and
along the Colorado River and on changes in the survival probabilities for endangered species.2
This paper describes how economists ascribe values to the things people can choose. The economic value of an ecosystem function or service relates to the contribution it makes to human welfare, where human welfare is measured in terms of each individual's own assessment of well-being. After developing how this definition is used, the paper describes problems and opportunities for advancing the state-of-the-art in measuring economic values for nature. These arguments are developed using recent studies that attempted to estimate economic values for ecosystems on a global scale. One implication of this evaluation is that there is a need for greater communication between ecologists and economists. Economic analyses must reflect the intricate web of physical interrelationships linking activities that have harmful effects in one part of an ecosystem to the potential effects on other parts. At the same time, economic values for ecosystems accept consumer sovereignty and should be interpreted as descriptions of the tradeoffs involved in evaluating well-defined changes to specific ecosystems.
Public policies that lead to a reduction in the emissions of air and water pollutants or the protection of sensitive ecosystems presumably increase the well-being of many members of society. Applied welfare economists are accustomed to measuring the welfare effects of policies that invoke price changes. If it is granted that the public good attributes of most dimensions of environmental quality preclude the development of well functioning markets for these service flows, how are the monetary values of changes in environmental quality to be measured? The past twenty to thirty years have seen the rapid development of the economic theory and techniques for measuring the demands for nonmarketed goods, and in this chapter we attempt to sketch out the major results. We review the basic concept of economic welfare and derive measures of welfare change for both changes in prices of market goods and changes in quantities and qualities of nonmarket goods. We then describe the principal economic techniques for estimating the benefits of environmental quality improvements when these improvements either directly affect individuals' well-being or indirectly affect individuals through constraints they face. Perhaps the major class of measurement methods is based on the observation that changes in environmental quality may cause individuals to alter purchases of goods and services that are complements or substitutes for environmental quality in their preference orderings. These revealed preference methods are the primary focus of this chapter. A second major approach to obtaining estimates of the benefits and costs of environmental changes, stated preference methods, are addressed in detail in later chapters. Our treatment of welfare effects places special emphasis on the connection between the underlying economic theory and practical empirical models.
Pressure on public budgets makes it important to quantify the value of public libraries to citizens and society. Public library services cause both direct and indirect benefits, corresponding to use, option, and nonuse values. Empirical data from a study of public libraries in Norway indicate that approximately 40% of their total value is motivated by direct use value, 20% by option value; which is a potential use value; and 40% by nonuse value. Nonuse values are thus an important component, and the exclusion of such values in cost–benefit analyses of public libraries may grossly underestimate public libraries' overall worth to society. The study elicits motivations for nonuse values of libraries and finds that 15–30% of total value is motivated by “global” altruism, directed toward others than the respondents' own close families.
Consequences for the Norwegian economy of an active policy against anthropogenic climate change can be analyzed by use of an economic model evaluating the differences between a reference scenario without control policies and alternative paths using economic incentives to reduce emissions of greenhouse gases. In traditional economic models the effect of the new taxes usually appears as reduced growth in macroeconomic indicators such as GDP, gross production and private consumption. When measures against climate change nevertheless are contemplated, it is due to a belief that the benefits of a policy more than outweighs the costs. Many benefits are hard to quantify. This is true for instance for the effects associated with the general welfare of people under different climatic conditions. However, it is possible to associate some tentative figures with some of the benefits likely to emerge from an introduction of a vigorous climate policy. In this paper we try to evaluate some usually neglected benefits associated with an introduction of a carbon tax. The benefits emerge from reduction in local pollution levels and the ensuing reduction in environmental damages to forests and lakes, health damages and damages to certain types of materials. In addition, benefits accruing from reduced traffic congestion, road damage, traffic accidents and noise levels are quantified. We find that the benefits thus accounted for go a long way toward compensating the economic loss measured as a reduction in GDP by the macroeconomic model MODAG. The uncertainty in the estimates of the benefits is assessed, and distributional consequences of the carbon tax are analyzed.
Foreword Preface 1. Valuing Public Goods Using the Contingent Valuation Method 2. Theoretical Basis of the Contingent Valuation Method 3. Benefits and Their Measurement 4. Variations in Contingent Valuation Scenario Designs 5. The Methodological Challenge 6. Will Respondents Answer Honestly? 7. Strategic Behavior and Contingent Valuation Studies 8. Can Respondents Answer Meaningfully? 9. Hypothetical Values and Contingent Valuation Studies 10. Enhancing Reliability 11. Measurement Bias
Benefit of climate policies: Some tentative conclusions, Discussion Paper 69
- K Aif~n
- A Brendemoen
- S Glomsrod
AIf~n, K., A. Brendemoen and S. GlomsrOd, 1992, Benefit of climate policies: Some tentative conclusions, Discussion Paper 69, Central Bureau of Statistics, Oslo.
Verd~tting av redu~ne luftforurensinger fra biler i Norge (Valuation of reduced air pollution from automobiles in Norway), Memorandum no. I, Department of Economics
- J Strand
Strand, J., 1985, Verd~tting av redu~ne luftforurensinger fra biler i Norge (Valuation of reduced air pollution from automobiles in Norway), Memorandum no. I, Department of Economics. University of Oslo (in Norwegian).
Verdsetting av reduserte luftforurensinger fra biler i Norge
- Strand