Question

4.   Provide an argument against using cost-benefit analysis as the only way of making social decisions

5.   Briefly explain either the travel-cost method or the hedonic price method for nonmarket valuation.

9.   Suppose the costs of a wetlands restoration program are expected to equal $200 in the first year of the program (year 0), $100 in the second year of the program (year 1), and $25 per year for the next 2 years after. Benefits will be $50 for the first year (year 0), $75 for the second year, and then $200 per year for the two years after that. At a discount rate of 0, what is the total value of net benefits for this program?

16.   Refer to the scenario from Question 14. Now suppose we want to allocate the resource over two periods. If 24 units of the resource are to be allocated between the periods, in a dynamic efficient allocation how much would be allocated to the first period, and how much to the second period, when the discount rate is zero?   

13.   What are use-values, and how do they differ from nonuse values? Discuss some of the aspects and implications of including nonuse values in cost-benefit analyses for environmental policies.

Answer 1

Cost -Benefit analysis also known as CBA is a technique which estimates the total money value of cost and benefits a community may be obtaining from a particular project to determine whether it is worthwhile to undertake the project. This method is widely popular in social decision making to see whether the project is worth its value given the costs that would be expended in running such a project.It analyses a project from the point of view of its benefits for the society where it is being established. For example , programs like construction of dams , roads or healthcare system are introduced after CBA analysis for the society.

Arguments against CBA analysis as the only way of making social decisions:

· There are many mistakes that creep in while detecting and enumerating Costs and Benefits of a project. CBA requires that all costs and benefits be detected and written. But human error often results in errors creeping in such as unintentionally omitting certain costs and benefits due to the inability to forecast indirect causal dealings. The obscurity involved in counting and assigning a monetary value to various insubstantial items leads to an inaccurate cost benefit analysis.

· Another argument against CBA is the amount of bias involved while estimating different costs and benefits. Since some costs and benefits are non-monetary in nature, like increases in customer satisfaction, here a money value is to be assigned in CBA based on past experiences which could be deliberately or not so biased. Such measures cause CBA to be inaccurate.

· As the estimation method for CBA of a project is done over a period of time, it is required to compute the present value. This equalizes all present and future costs and benefits by evaluating all items in terms of present-day values, which eliminates the need to account for inflation or speculative financial gains.This poses a significant disadvantage for CBA as even if we can accurately calculate the present value, there is no assurance that the discount rate used in the calculation is realistic.

· Another argument against CBA is seen when utilizing a CBA there is the likelihood that the instrument for evaluation turns into the proposed budget. When a CBA is put together and presented to management, they might view the expected costs as actual rather than estimation, which may leads to misusing costs and setting impractical goals while approving budget for such a project.