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CBA (Cons (Issues determining discount rate (Tyranny of discounting) -…
CBA
Cons
Issues determining discount rate (Tyranny of discounting) - best-practises introduced, but a variety of options remain, e.g. dual discounting, e.g. discounting reduction over time, there's an efficiency-equity trade off with discounting, developing countries typically use higher discount rates too
As based on 'incomplete moral preferences', i.e. it allows potentially non-'citizen', individual preferences to guide society - argues we need a 'plural valuation' that accounts for intrinsic value - i.e. stuff not in TEV (Randal)
Equity issues: Ensures Pareto Efficiency, but not necessarily equity
Non-market environmental goods and services are only typically incorporated if they alter the utility of humans (i.e. have a utility externality) - thus, many environmental features which may be important, but not cared about or unknown e.g. ecosystem services may be excluded
Can't capture all values, thus CBA process is essentially an approximation of the truth rather than the truth
The method, in some cases 'prices the priceless' (Ackerman); idea of valuing the environment (see Constanza) is to give the environment value and thus increase its protection, however, it also treats the environment as a commodity --> exploitation if costs are less than other benefits (essentially legitimising weak, rather than strong sustainability)
Shadow costs can be very difficult to calculate if the scope or extent of the externalities attached to a good or service are unknown
Sensitivity analysis is conducted to try and ensure that the results are robust, however, there's still a wide range of uncertainties and risks involved
Use of CV opens the method up to the numerous issues faced by the CV method such as HB, scope issues and a gap between WTP and WTA depending on which method is used
Linked to pricing the priceless, it's common for CBAs for, say infrastructure projects, to incorporate VSL; there's a host of issues with this method, not least of which is that it typically results in lower life value estimates for the developing world and Ackerman reports that some VSL studies have calculated the implicit price of a child's life based on the time saved by not doing their car seat properly at £500,000
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Determination of standing population/spatial inequity --> Kniivila identifies that CBA at local scale fails, but passes at regional - but most benefits are incident on the regional population, whilst most costs on the local
Optimism Bias: Mostly overcome by following best-practise adjustments, however there's overstatements which means that again, it's an uncertain method
Error sources: Strategic error, e.g. economists for hire giving the desired outcome, forecasting error (predicting costs/events beyond a few months is very uncertain), measurement error (impacts inaccurately recorded) and valuation error
Scientific knowledge may not be well-understood by the public; e.g. if information on water quality issues is available but not easily translatable, it may be excluded from valuations (correspondence problem)
OCED note that it's often a measure of political welfare, not social welfare
Pros
Encourages avoidance of lexical thinking, or focussing bias
Ensures rational, structured decision-making
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Baseline 'do nothing' option allows consideration of the do-nothing approach which is often not considered
Creating a long list, followed by a short list ensures consideration of a wide variety of options, and results in optimisation via selection of the options that yield the maximum cost-benefit ratio
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Allows inclusion of non-market goods in policy-making through use of CV, HP, TC methods
Standardisation of the process allows creation of a database of comparable projects, which allows for more accurate decision-making, e.g. determining optimism bias
Through use of the Kaldor Hicks Compensation Test, we can ensure that the solution is Pareto Efficient (when hypothetical transfers are allowed)
If the Green Book guidance is followed, following the discounting of values, a distributional analysis should be considered, showing that whilst the primary focus is efficiency, there's increasing best-practise addressing equity too
Sources
- Kaldor Hicks
- Randal
-HM Treasury Green Book
- Pearce et al - most EU Directives
- Valencian shadow pricing - Molinos-Senate
- SMART objectives
- Thames Tidalway Sewage system update 2015 - DEFRA
- Groom and Hepburn - decreasing discount rate now standard in France, UK, Norway etc.
- Weikard - dual discounting
- Ackerman - pricing the priceless
- OECD - political or social welfare
- Kniivela - Finald
- Hutton - sanitary MDG cha
- Viscusi - VSL