Cost Benefit Analysis and Environmental
Valuation
AEP 32306
Script
Anneli Janzer
,Contents
Introduction............................................................................................................................................. 1
Intro to CBA ......................................................................................................................................... 1
CB-Scenarios ........................................................................................................................................ 1
CB Perspectives ................................................................................................................................... 1
Scoping .................................................................................................................................................... 1
Welfare measures / Introduction to Environmental Evaluation ............................................................. 3
1. Rationale behind an economic valuation exercise ...................................................................... 3
2. The ethical foundations of economic valuation .......................................................................... 3
3. The concept of economic value................................................................................................... 4
4. The concept of indirect utility ..................................................................................................... 5
5. Welfare measures (equivalent and compensating variation) and their relation to property
rights .................................................................................................................................................... 6
6. Economic Valuation Methods ..................................................................................................... 8
Contingent Valuation .............................................................................................................................. 9
Definition and Popularity .................................................................................................................... 9
Purpose and structure of CVM questionnaire..................................................................................... 9
Biases and frequent problems .......................................................................................................... 12
Welfare measures and their measurement ...................................................................................... 12
Choice Experiments(CE) ........................................................................................................................ 13
Definition and reasons for use .......................................................................................................... 13
Designing a choice experiment study................................................................................................ 14
Experimental design .......................................................................................................................... 15
Economic model and estimation ....................................................................................................... 16
Discounting ............................................................................................................................................ 17
Market prices and Changes in the Producer Surplus ............................................................................ 19
Calculating k-shift .............................................................................................................................. 20
General model: n countries and n regions ........................................................................................ 25
Distributional Issues .............................................................................................................................. 28
Risk and uncertainty 1 ........................................................................................................................... 30
Risk and uncertainty 2 ........................................................................................................................... 33
Estimating demand curves .................................................................................................................... 37
Exogeneity problem .......................................................................................................................... 37
Estimation of a demand equation ..................................................................................................... 37
Mean aggregated demand ................................................................................................................ 38
Elasticity............................................................................................................................................. 38
,Travel cost method................................................................................................................................ 39
Zonal travel cost and individual travel cost (ZTCM and ITCM) .......................................................... 40
Individual travel cost Method ........................................................................................................... 42
Annex ..................................................................................................................................................... 43
Contingent Valuation example Questionnaire .................................................................................. 43
Cheap talk .......................................................................................................................................... 45
Example Video on Youtube ............................................................................................................... 46
Tutorial Stata on campus....................................................................................................................... 47
, Introduction
Intro to CBA
• You need to compare projects to others, with which you
could make more money
• Financial CBA: maximizing profits, only look at money
• Economic/Social CBA: looks at larger economy and other
stakeholders
o Uses not the market price, but shadow prices
CB-Scenarios
• Cost-Effective analyses, e.g. health or education
• Which aspects are separable and can be analyzed on their own
• A project is the smallest separable investment unit that can be planned, financed and implemented
independently
• Look at every possible scenario to know where to spend your money with
CB Perspectives
• Private firms
o Usually work for their own benefit and want to maximize the money they can make
o Costs: e.g. wages to employees, renting or purchasing equipment or taxes
o Benefits: interests from their investments or revenues or government subsidies
• The bank
• The government
o To tax vs to subsidize
• Society
o Even though non-market goods might not have a direct monetary value, society can profit from them
and a loss would mean a loss of benefit, which is why they have to be included into the Analysis
o In a market, sometimes the price does not reflect the value of a product for society
→ adjustments need to be made to account for distortion
Scoping
= political context and setting
• Political
• Temporal
• Societal
boundaries
CBA in the policy cycle
1
Valuation
AEP 32306
Script
Anneli Janzer
,Contents
Introduction............................................................................................................................................. 1
Intro to CBA ......................................................................................................................................... 1
CB-Scenarios ........................................................................................................................................ 1
CB Perspectives ................................................................................................................................... 1
Scoping .................................................................................................................................................... 1
Welfare measures / Introduction to Environmental Evaluation ............................................................. 3
1. Rationale behind an economic valuation exercise ...................................................................... 3
2. The ethical foundations of economic valuation .......................................................................... 3
3. The concept of economic value................................................................................................... 4
4. The concept of indirect utility ..................................................................................................... 5
5. Welfare measures (equivalent and compensating variation) and their relation to property
rights .................................................................................................................................................... 6
6. Economic Valuation Methods ..................................................................................................... 8
Contingent Valuation .............................................................................................................................. 9
Definition and Popularity .................................................................................................................... 9
Purpose and structure of CVM questionnaire..................................................................................... 9
Biases and frequent problems .......................................................................................................... 12
Welfare measures and their measurement ...................................................................................... 12
Choice Experiments(CE) ........................................................................................................................ 13
Definition and reasons for use .......................................................................................................... 13
Designing a choice experiment study................................................................................................ 14
Experimental design .......................................................................................................................... 15
Economic model and estimation ....................................................................................................... 16
Discounting ............................................................................................................................................ 17
Market prices and Changes in the Producer Surplus ............................................................................ 19
Calculating k-shift .............................................................................................................................. 20
General model: n countries and n regions ........................................................................................ 25
Distributional Issues .............................................................................................................................. 28
Risk and uncertainty 1 ........................................................................................................................... 30
Risk and uncertainty 2 ........................................................................................................................... 33
Estimating demand curves .................................................................................................................... 37
Exogeneity problem .......................................................................................................................... 37
Estimation of a demand equation ..................................................................................................... 37
Mean aggregated demand ................................................................................................................ 38
Elasticity............................................................................................................................................. 38
,Travel cost method................................................................................................................................ 39
Zonal travel cost and individual travel cost (ZTCM and ITCM) .......................................................... 40
Individual travel cost Method ........................................................................................................... 42
Annex ..................................................................................................................................................... 43
Contingent Valuation example Questionnaire .................................................................................. 43
Cheap talk .......................................................................................................................................... 45
Example Video on Youtube ............................................................................................................... 46
Tutorial Stata on campus....................................................................................................................... 47
, Introduction
Intro to CBA
• You need to compare projects to others, with which you
could make more money
• Financial CBA: maximizing profits, only look at money
• Economic/Social CBA: looks at larger economy and other
stakeholders
o Uses not the market price, but shadow prices
CB-Scenarios
• Cost-Effective analyses, e.g. health or education
• Which aspects are separable and can be analyzed on their own
• A project is the smallest separable investment unit that can be planned, financed and implemented
independently
• Look at every possible scenario to know where to spend your money with
CB Perspectives
• Private firms
o Usually work for their own benefit and want to maximize the money they can make
o Costs: e.g. wages to employees, renting or purchasing equipment or taxes
o Benefits: interests from their investments or revenues or government subsidies
• The bank
• The government
o To tax vs to subsidize
• Society
o Even though non-market goods might not have a direct monetary value, society can profit from them
and a loss would mean a loss of benefit, which is why they have to be included into the Analysis
o In a market, sometimes the price does not reflect the value of a product for society
→ adjustments need to be made to account for distortion
Scoping
= political context and setting
• Political
• Temporal
• Societal
boundaries
CBA in the policy cycle
1
