Hostname: page-component-cd9895bd7-mkpzs Total loading time: 0 Render date: 2024-12-29T09:46:47.367Z Has data issue: false hasContentIssue false
  • English
  • Français

Benefit-Cost Analysis of Environmental Projects: A Plethora of Biases Understating Net Benefits

Published online by Cambridge University Press:  19 January 2015

Philip E. Graves
Philip E. Graves*
Affiliation:
University of Colorado at Boulder
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

There are many reasons to suspect that benefit-cost analysis applied to environmental policies will result in policy decisions that will reject those environmental policies. The important question, of course, is whether those rejections are based on proper science. The present paper explores sources of bias in the methods used to evaluate environmental policy in the United States, although most of the arguments translate immediately to decision-making in other countries. There are some “big picture” considerations that have gone unrecognized, and there are numerous more minor, yet cumulatively important, technical details that point to potentially large biases against acceptance on benefit-cost grounds of environmental policies that have true marginal benefits greater than true marginal costs, both in net present value terms. It is hoped that the issues raised here will improve future conduct of benefit-cost analyses of environmental policies.

Keywords

benefit-cost analysisenvironmental policydecision makingchoice behaviorpublic goodswillingness-to-paywillingness-to-acceptprecautionary principlehedonic methodssum of specific damageshealth effects modelenvironmental perceptionstravel cost method
Type
Article
Information
Journal of Benefit-Cost Analysis , Volume 3 , Issue 3 , 23 August 2012 , pp. 1 - 25
Copyright
Copyright © Society for Benefit-Cost Analysis 2012

References

Blomquist, G.C., Berger, G., and Hoehn, J. (1988). New estimates of the quality of life in urban areas. American Economic Review, 78, 89–107.Google Scholar
Bockstael, N.E. and McConnell, K.E. (2007). Hedonic wage analysis. Chapter 7 of Environmental and Resource Valuation with Revealed Preferences: A Theoretical Guide to Empirical Models (Volume 7 in the series The Economics of Non-Market Goods and Resources) Springer: The Netherlands.Google Scholar
Boyce, R. R., Brown, T. C., McClelland, G. H., Peterson, G. L., and Schulze, W. D. (1992). An experimental examination of intrinsic values as a source of the WTA-WTP disparity. American Economic Review 82(6), 1366–1373.Google Scholar
Clarke, E.H. (1971). Multipart pricing of public goods. Public Choice. 11, 17–33.CrossRefGoogle Scholar
Flores, N.E. and Graves, P.E. (2008). Optimal public goods provision: implications of endogenizing the labor/leisure choice. Land Economics, 84(4), 701–707. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1477162CrossRefGoogle Scholar
Graves, P.E. (2009) “A note on the valuation of collective goods: overlooked input market free riding for non-individually incrementable goods,” The B.E. Journal of Economic Analysis & Policy 9(1), Article 5. Available at: http://www.degruyter.com/view/j/bejeap.2009.9.1/bejeap.2009.9.1.2178/bejeap.2009.9.1.2178.xml? or http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1119316.CrossRefGoogle Scholar
Groves, T and Ledyard, J.O. (1977). Optimal allocation of public goods: a solution to the “free rider” problem. Econometrica 45(4), 783–809.CrossRefGoogle Scholar
Hahn, Robert (2010). Designing smarter regulation with improved benefit-cost analysis. Journal of Benefit-Cost Analysis 1(1), Article 5.CrossRefGoogle Scholar
Hanemann, W. M. (1991). Willingness to pay and willingness to accept: how much can they differ? American Economic Review 81(3), 635–647.Google Scholar
Horowitz, J. K., and McConnell, K.E. (2002). A review of WTA/WTP studies. Journal of Environmental Economics and Management 44, 426–447.CrossRefGoogle Scholar
Kahneman, D., Knetsch, J. L., and Thaler, R. H. (1990). Experimental tests of the endowment effect and the Coase theorem. Journal of Political Economy 93, 1325–1348.CrossRefGoogle Scholar
Kuminoff, N. V. (2007). Recovering preferences from a dual-market locational equilibrium. Manuscript. Department of Agricultural and Applied Economics. Virginia Tech University.Google Scholar
Plott, C.R. and Zeiler, K. (2005). The willingness to pay-willingness to accept gap, the “endowment effect,” subject misconceptions, and experimental procedures for eliciting valuations. American Economic Review 95(3), 530–545.CrossRefGoogle Scholar
Portney, P.R. (1994). The contingent valuation debate: why economists should care. The Journal of Economic Perspectives 8(4), 3–17.CrossRefGoogle Scholar
Roback, J. (1982). Wages, rents, and the quality of life. Journal of Political Economy 90, 1257–1278.CrossRefGoogle Scholar
Samuelson, P.A. (1954). The pure theory of public expenditures. Review of Economics and Statistics 36, 387–389.CrossRefGoogle Scholar
Tversky, A. and Kahneman, D. (1991). Loss aversion in riskless choice: a reference-dependent model. Quarterly Journal of Economics 104(4), 1039–1062.CrossRefGoogle Scholar