Lecture 8 - Benefit Cost Analysis and Discounting Flashcards
(34 cards)
Social Cost Benefit Analysis for the Environment
Social Cost-Benefit Analysis: Needed when economic actors do not automatically fix problems themselves.
–> It is used for costs where responsibility for problems is shared or misallocated, where costs and benefits poorly matched in terms of who pays and who gets benefits
Externalities have ‘socialized’ costs rather than ‘privatized’
We pollute air here and air takes the pollution somewhere else who pays the costs but would be nice if we paid the costs
Social Cost Benefit Analysis Nuances
Nuance is whose situation you’re thinking of, when, how and strength of the policy in mind
Pareto Efficiency
No loser policy’
Defintion: Scenario where no one can be made better off without someone else worse off
- Completely neutral to inequality (so does not guarantee social optimum, maxxed societal utility)
- Many allocations can be Pareto efficient
Pareto Improvement
A scenario where some policy X makes no one worse off, but at least one person has been made better off (can itself be an objective)
- Markets are typically great at this due to mutual benefit of trading
Kaldor Hicks Criterion
Defintion: A scenario where those made better off by some action A could theoretically give some of their ‘winnings’ to those made worse off by the policy so the losers would break even and the winners would still have some left.
This is a potential Pareto improvement, but only if winners want to compensate and will still have some left over
Rawlsian ‘Maximin’
Definition: A scenario in which the utility or position of the worst-off in society is maximized relative to some objective (used more in non-redistributive policy)
Minimax
Definition: Scenario in which the probability of the worst possible outcome (relative to some objective) is minimized.
Minimax regret: Scenario in which the probability of the worst possible regret is maximized (regret being the diff between utility in the best case and worst case scenario)
Social Costs and Benefits Examples
- Human health (asthma, death rate, etc.)
- Existence rate (grand canyon, exotic birds, etc.)
- Costs in economic productivity of other goods
- Recreation and employment (bird watching, fishing, etc.)
- Environmental stability (climate regulation, etc.)
The Gap between Social and Private Supply Costs and result on surplus’
SEE SLIDES FOR GRAPHS
Valuing the Gap between Social and Private Supply Costs Methods
- Stated Preference (CV, Choice experiments, dichotomous choice method)
- Revealed preference (reverse auction, TCM)
Dichotomous Choice Method
Pairs good semi-randomly and then respondent says yes or no I support/oppose and then repeat again and can derive the WTP, WTA
(Reverse) Auction Method
RP method
- WTP and WTA is elicited by auction. In WTA, prices are slowly increased until a bid is made and auction ends. In sealed-bid reverse auction, participants write their lowest WTA and send it in. The lowest price is chosen.
- Reverse auction is more common and used to show WTA
Hedonic Valuation
Comparison of two items in the market that are very close to each other. Only difference is environment around them. E.g. one house has nice environment and other doesn’t. Difference in price is value of the non-market good.
Three assumptions of hedonic valuation
- Independence
- Time-invariant preferences
- Perfect information
Adam Smith’s View of Social Costs
Rational and self-interested economic actors so invisible hand means the market will regulate itself because everyone is self-interested
Jeremy Bentham’s View of Social Costs
Utilitarian morality; role of policy and government to balance pleasures nd pains
- Gov’t is third-party maximizing aggregate social utility
- One of the founders of CBA
Economic Rationality
A group of technical, mathematical, scientifically testable hypotheses about human behavior that were originally agreed by consensus of economists to allow analysis to go forward without data, etc.
BUT These assumptions for most economic theory do not usually hold and many things market does not do so gov’t is needed
Economic Assumptions
Don’t make your analysis true but they conditionalize it (make it true under certain conditions).
Markets create Pareto efficiency ‘under certain conditions’ which is assumptions which allows economic methods to work at least in part if assumptions are true.
Implication behind RP Theory
RP theory means that any private utility is maximized by agents so any adjustment in bundl of goods in reaction to being made worse off by a policy can be interpreted as a cost, especially if a policy is not attempting to correct an externality.
Difficulty of Calculating Social Costs/Environmental Damages
-Real world is messy and correlation not always causation so need to detective work to determine cause of damages
- Connecting occurrence in environment to particular action is more difficult
- Part of CBA is just figuring out what causes what, before costs and benefits come into the picture.
Extinction Value
Hard to place price on extinction e.g. the vultures are really valuable sometimes culturally but also to clean up dead bodies, but how to put a price on this for extinction prevention policy?
Establishing Environmnetal-Causation
Found that vulture collapse connected to human deaths but is this correlation or causation? (Vet painkiller posion for vultures = vultures dying = more cows rotting without cleaning = rabid dogs now have more food = increase in rabies = problem for public health
So then used value of human life to estimate value of mortality damages from this drug. Note: Didn’t estiate costs so just a benefit analysis.
Risk-Opportunity Analysis (ROA)
New developing methodology looking to be alternative to CBA in certain situations; want it to be not just methodology but a framework
Risk-Opportunity Analysis——View of convention
Unchanging behaviors, leading to stable equilibrium
Marginal changes, and ”shocks” that settle back down into equilibrium eventually (e.g. if a river floods from rainfall, it will eventually go back to stable)
