Unit 4: Trade Off Analysis: Ch.7 Flashcards
(38 cards)
What is Cost-Benefit Analysis
Measure all costs and benefits of a proposed project/policy in monetary terms
What are the steps of a Cost-Benefit Analysis
- List all costs and benefits to a proposed action
-Obtain estimates for those that have monetary units
-For C/B that don’t have monetary units-use nonmarket valuation techniques to obtain estimates
-If nonmarket values cannot be obtained get transfer values or expert opinions
-Add up all C & B
-Compare C & B to obtain recommendation
What are the Cons of a Cost-Benefit Analysis
-Difficult to estimate nonmarket value impacts
-Does not tell us about the C/B across society
What are the 2 ways Cost-Benefit analysis is presented
1) NET BENEFITS: Total Benefits - Total Costs: if Negative = Costs > Benefits
2) BENEFIT-COST RATIO: Total benefits/ total costs
Ratio < 1 = Costs > Benefits
What are Real/ Inflation Adjusted Dollars
Monetary estimates that account for changes in price levels over time
What is Discounting
Costs and Benefits in the future should be assigned less weight relative to current costs and benefits
How does Discounting look at the future
Devalues impacts in the future as less relevant than the impact now
The further out in time/ or higher discount rate = Lower Present Value
What is the Present Value
Current value of future C/B
What is Discount Rate
Annual rate at which future benefits or costs are discounted relative to current benefits or costs
What is a Higher discount rate in relation to the future
Less value in the future
What is a longer time horizon in relation to value
Less value in the future
What is the relationship b/w Discount rates and Future Impacts
Discount rates make future impacts in the future irrelevant
Not worth it to look at future damage
How does a High Discount Rate look at future
Favours Present over future
How does a Low Discount Rate look at future
Greater weight to Future costs
How are Discount Rates Chosen
1) Set it to equal rate of return on low risk investment (Gvt bonds)
2) Social Discount Rate: appropriate social valuation of the future
What is the Pure Rate of Time Preference
Humans prefer present over future
What is Contigent Valuation
Asks people their willingness to pay for enviromental benefits across time scales
What is Value of Statistical Life
How much society is willing to pay to prevent one death from environmental pollution
What is Value of Statistical Life based on
1) Contingent Valuation
2) Wage Risk Analysis
What is Wage Risk Analysis
the required compensation needed to entice people to high-risk jobs: estimates value of statistical life
What are some critiques of Value of Statistical Life
-lower in developing countries
-estimates increase in proportion to income
-different policies have different VSLs
-low values can hinder safety improvements
-human life is priceless
-methods other than CBA should be used when policies affect mortality
What is Risk
Variability/Randomness that can be quantified
All potential outcomes are KNOWN or can be estimated
Can be incorporated in CBA
What is Uncertainty
Variability/Randomness that CANNOT be accurately quantified
Cannot be incorporated into CBA
What is Expected Value
The weighted average of potential values
EV = P x NB
P=probability outcome will occur
NB=Net benefit of outcome
