Cost Benefit Analysis and Environmental
Valuation
AEP 32306
Summary
Anneli Janzer
1
, Introduction
• Financial CBA: maximizing profits, only look at money
• Economic/Social CBA: looks at larger economy and other stakeholders
• In a market, the price does sometimes not reflect the value of a product for society
• Scoping
o Political
▪ Who is decision maker?
▪ Baseline vs policy alternative (3-5, more are not effective)
o Temporal
▪ Public works usually have a natural life time (~50 years)
▪ Policies may have a limited time span, but can also last forever; some guidelines recommend
an infinite time horizon
▪ Uncertainty increases the further you look ahead→longer time horizons matter less due to
discounting
o Societal
▪ CBA is anthropocentric: animals count as far as their welfare matters to people
Welfare Measures
Economic valuation exercise
Three reasons for doing an economic valuation exercise
1. valuation results are used for inputs into social/private CBA (valuation results used as scarcity signals)
2. to evaluate environmental damages
3. obtain statistical information about how and why different people value damages differently
• Market needs intervention
o Fixing the price signal
o Provision of public goods
o Norms, laws, institutions what to do in the absence of markets
• If market fails, we need CBA to intervene in market and make sure that treatment is better than
control
• If no market price=valuation exercise
o Mimics scarcity signal provided by market
o Changes over time and space and resource itself
Ethical foundations of EV
Utilitarianism
• Measure happiness in units of utility →maximize aggregate utility
• Ignores negative freedom/independent of the rights of persons
• Only cares for outcome/consequence of our actions, not actions themselves (consequentialist)
Consequentialism
• Guiding principle in economics
• Only consequence of policy matters
Anthropocentrism
• Only happiness of humans, intrinsic value cannot be measured in monetary units
• WTP: intrinsic values can enter EV through decisions of humans →well-being of other organisms still
counts as far as people care about them
o Unethical to put a price on natural resources?
o Tool to compare results
Ethical limits of what should (not) be valued:
instrumental/secular values: goods and services, recreation, ice cream, hydropower dam
relational/sacred/intrinsic values: traditions, religions, identity, the right to live…
• Narrow decision-makers to regions, countries, the whole world
o Present generation is decision-maker, no past or future generations, but future is included in
present (or should be)
1
Valuation
AEP 32306
Summary
Anneli Janzer
1
, Introduction
• Financial CBA: maximizing profits, only look at money
• Economic/Social CBA: looks at larger economy and other stakeholders
• In a market, the price does sometimes not reflect the value of a product for society
• Scoping
o Political
▪ Who is decision maker?
▪ Baseline vs policy alternative (3-5, more are not effective)
o Temporal
▪ Public works usually have a natural life time (~50 years)
▪ Policies may have a limited time span, but can also last forever; some guidelines recommend
an infinite time horizon
▪ Uncertainty increases the further you look ahead→longer time horizons matter less due to
discounting
o Societal
▪ CBA is anthropocentric: animals count as far as their welfare matters to people
Welfare Measures
Economic valuation exercise
Three reasons for doing an economic valuation exercise
1. valuation results are used for inputs into social/private CBA (valuation results used as scarcity signals)
2. to evaluate environmental damages
3. obtain statistical information about how and why different people value damages differently
• Market needs intervention
o Fixing the price signal
o Provision of public goods
o Norms, laws, institutions what to do in the absence of markets
• If market fails, we need CBA to intervene in market and make sure that treatment is better than
control
• If no market price=valuation exercise
o Mimics scarcity signal provided by market
o Changes over time and space and resource itself
Ethical foundations of EV
Utilitarianism
• Measure happiness in units of utility →maximize aggregate utility
• Ignores negative freedom/independent of the rights of persons
• Only cares for outcome/consequence of our actions, not actions themselves (consequentialist)
Consequentialism
• Guiding principle in economics
• Only consequence of policy matters
Anthropocentrism
• Only happiness of humans, intrinsic value cannot be measured in monetary units
• WTP: intrinsic values can enter EV through decisions of humans →well-being of other organisms still
counts as far as people care about them
o Unethical to put a price on natural resources?
o Tool to compare results
Ethical limits of what should (not) be valued:
instrumental/secular values: goods and services, recreation, ice cream, hydropower dam
relational/sacred/intrinsic values: traditions, religions, identity, the right to live…
• Narrow decision-makers to regions, countries, the whole world
o Present generation is decision-maker, no past or future generations, but future is included in
present (or should be)
1
