Reading:

Journal Exercise: From the Amundson reading above summarize the values that soil has other than the simple ability to grow crops for human consumption. Discuss what Amundson and Bierman agree upon is happening to soil as a resource?

Cost - benefit analysis from an environmental perspective.

Consider the purchase of a car. One of the factors in weighing the pros and cons is the mileage the vehicle gets. One can calculate the differential cost for different scenarios and thus make a more informed decision. This can be though of as a component of cost-benefit analysis.

average mpg for car cost if travel 100000 miles, gas is $1.5/gallon cost if travel is 50,000 miles and gas is $1.5/gallon cost if travel 100000 miles, gas is $2/gallon
10 15000 7500 20000
15 10000 5000

13333.3333333333
20 7500 3750 10000
25 6000 3000 8000
30 5000 2500 6666.66666666667
35 4285.71428571429 2142.85714285714 5714.28571428571
40 3750 1875 5000
45 3333.33333333333 1666.66666666667 4444.44444444444
50 3000 1500 4000

In first light a cost-benefit analysis is simple enough, a judicious weighing of the pros and the cons. A course of action where the cost outweighs the benefits should probably not be pursued. Of several choices the least costly one that would produce the desired benefits would be the likely choice.

To see how, in practice, the endeavor is actually much more difficult consider the cost-benefit analysis for a dam.

What are some of the costs associated with a dam?

Benefits associated with a dam:

These are some of the costs and benefits we explored in class before. You can probably think of others. The point is simply that it is not an easy task. One time cost versus annual costs also need to be considered, so that the lifetime of a dam and of the benefits becomes critical. So the time scale of the cost-benefit analysis is crucial. Also, how do you include the cost of event that may or may not happen? Multiply cost by the probability? This would work for many dams, but not for an individual dam.Historically, cost-benefit analyses have overestimated the benefits.

One basic convention in these analysis is the use of one unit of measure for your costs and benefits. Otherwise one could be considered as comparing apples and oranges. The common units is usually dollars, and any inflation with time must be considered. How do you put a dollar amount on lives saved or lost? One way that has been used is to see how much additional people expect to be paid for dangerous jobs. If a job with an additional 2% mortality rate is worth $10,000 more, then one could postulate that 1 life would be equal to 50*$10,000 or $500,000. This general type of approach can be challenged on many fronts. Those who take these jobs are often risk takers and not representative of the population. They may even be trading the emotional exhilaration for the hazard, i.e. they are being paid in additional ways to what shows up in their paycheck. Human life would be undervalued in this approach. Also, in this approach the value of life is different in different countries, and is probably different for men, women and children. Are we comfortable with this? Is that truly ethical? Can the value of everything be reduced to dollars is a legitimate question.

One potential error in estimating worth is the assumption that people have to actually be willing to pay the assessed value. However, many people might be willing, but just not able to come up with the dollars. They don't have that type of capital, but they do have other forms of capital they might be willing to expend. To see the possibilities, let us say that the worth of a person is $500,000 dollars, and that person is willing to risk his or her life to save that tree by perching in it to prevent it from being cut down. Is that tree then worth $500,000 standing, or some proportion of the value of that life? Why not count the hours an environmentalist spends on protecting some threatened species or habitat as part of the habitats value? They don't have the money, but they do have other forms of capital to demonstrate its worth. Worth is a human concept that can be constructed in different ways. Which construction is the better one? The point is that a cost-benefit analysis is not just simple accounting - it is based on a cultural model of worth.

A primary difficulty is putting a dollar cost on things such as decreased water quality, loss of a species, loss of archeological treasures, loss of life and much else.

In addition to doing the cost benefit analysis for one option it is better to consider alternatives that may try to achieve the same goals.


Links:

Cost-Benefit Analysis: Issues in Its Use in Regulation by John L. Moore, Chief, Environment and Natural Resources Policy Division.

Remarks by Governor Edward M. Gramlich At the Werner Sichel Economics Lecture-Seminar Series, Western Michigan University, Kalamazoo, Michigan, October 16, 2002 The Methodology of Benefit-Cost Analysis.

Restoring the Lower Snake River: Saving Snake River Salmon and Saving Money, ECONOMIC ANALYSIS BY PHILIP S. LANSING, ANALYTICA, ADDITIONAL TEXT BY EVE VOGEL

San Jose State University Economics Department intro to cost benefit analysis.


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