Question

3.The U.S. has many treasures that warrant their protection, such as the Great Lakes, the nation’s coastal wetlands, and the Smoky Mountains.

a.Explain why simple cost-benefit analysis involving public goods such these are so difficult to undertake.

b.Should public policy overrule pure economics in these situations? Explain.

The explanation must be one paragraph long. The explain must be clear, persistent, and number for each answer.

Answer 1

a) When dealing with projects that involve either conservation of natural resources or its destruction, a simple monetary economic assessment becomes problematic. The reason is that these are public goods and suffer from externality, which results in their being undervalued. This is due to the problem of free ridership in case of public goods. The various values of a public good may be summarized as: use value (resource value, ecological services, aesthetic values), non-use values (inter generational equity). While the economic system values only the resource value it fails to take into account the other values. A simple cost-benefit analysis will not reflect the correct evaluation, as people being free rider will be not reveal the actual value they give to a public good.

b) Conventional economic analysis may fail to address the true valuation of public goods. Hence here Public Policy may need to be involved. It may over-ride the economic limitations and take up projects that are important even with poor cost benefit analysis. But when public policy itself needs to choose between projects it will have to resort to economic tools. Thus public policy alone cannot answer the problem. To determine the true value of a public good methods such as revealed preference method, travelling cost method or hedonic price method may be taken.

Note: You may want to check up on the pricing methods in the last sentence of the above para.