Ch 9 - Benefit-Cost Analysis In Environmental Decision Making

Front 1

Making time adjustments
-Benefits and costs must be adjusted to account for how their values change over time

Assessing relative values
-Benefits and costs must be systematically compared

Back 1

Two major steps that follow the estimation of environmental benefits and costs:

Front 2

Time Adjustments

Back 2

The purpose of these types of adjustments are:
-Benefits and costs do not accrue to society at the same time
-Benefits and costs often accrue in the future

Front 3

Present value determination
-accounts for the opportunity cost of money

Inflation correction
-accounts for changes in the general price level

Back 3

The Two types of time adjustments:

Front 4

Present Value Determination

Back 4

Discounts a future value (FV) into its present value (PV) by accounting for the opportunity
cost of money (its highest valued alternative use, which is the rate of return (r) on
investment)

Front 5

Present Value Determination

Back 5

Explains why money loaned in the present must be paid back in the future with interest

Front 6

Present Value Determination

Back 6

Further explains why the present value of monies received in the future is discounted

Front 7

Present Value

Back 7

_____ _____ determination is the means by which future environmental benefits and costs are adjusted

Front 8

Discount Factor

Back 8

[1/(1 + r)t] is the ____ _____

-r is the discount rate
-t is the number of time periods

Front 9

Present Value(PV)

Back 9

_____ ______= FV[1/(1 + r)t]

Front 10

Social Discount Rate

Back 10

Discount rate used for public policy initiatives based on the social opportunity cost of funds

Front 11

Inflation Correction

Back 11

Adjusting for movements in the general price level

Front 12

Inflation Correction

Back 12

The two things listed below are examples of what?

-Convert a real variable today to its future nominal value to account for expected inflation

-Converting a nominal value to its real value

Front 13

Deflating

Back 13

Converts a nominal value into it's real value

Front 14

-Present value of benefits (PVB)

-Present value of costs (PVC)

Back 14

These two things are used in Deriving Time-Adjusted Benefits
and Costs:

Front 15

Present value of benefits (PVB)

Back 15

is the time adjusted magnitude of incremental benefits associated with an environmental policy change

Front 16

Present value of benefits (PVB)

Back 16

_____= S(bt/(1+rs)t)

where bt represents real benefits

Front 17

Present value of costs (PVC)

Back 17

the time adjusted magnitude of incremental costs associated with an environmental policy change

Front 18

Present value of costs (PVC)

Back 18

=S(ct/(1+rs)t)

where ct represents real costs

Front 19

Step 1: Determine if an option is feasible
Step 2: Select from among feasible options

Back 19

Two steps in the Environmental Benefit-Cost Analysis

Front 20

feasible

Back 20

Use the benefit-cost ratio
If PVB/PVC > 1 then option is ________.

Front 21

feasible

Back 21

Use the present value of net benefits(PVNB), which equals (PVB – PVC)
If PVNB > 0 then option is _______.

Front 22

allocative efficiency

Back 22

To achieve ______ ________
Maximize PVNB = S(bt-ct)/(1+rs)t for all t periods, among all feasible alternatives

Front 23

cost-effectiveness

Back 23

To achieve ____-_________
Minimize PVC = S(ct/(1+rs)t) for all t periods, among all feasible alternatives that achieve a predetermined benefit level

Front 24

Measurement Problems
Estimation is particularly problematic due to
intangibles
Implicit costs

Equity Issues
Distribution of benefits and costs may be
highly skewed

Back 24

Reservations About the Use of
Benefit-Cost Analysis include:(2 things)

Front 25

Reagan’s Executive Order 12291

Back 25

Explicitly called for maximizing net benefits
(allocative efficiency) and choosing the least-cost alternative (cost-effectiveness)

Front 26

Regulatory Impact Analysis (RIA)

Back 26

A requirement under executive order 12291 that called for information about the potential benefits and costs of a major federal regulation

Front 27

Reagan’s Executive Order 12291

Back 27

Applicable to any “major rule,” i.e., a regulation expected to have an annual impact of at least $100 million

Front 28

Clinton’s Executive Order 12866

Back 28

Explicitly refers to adopting/proposing regulations for which benefits justify costs(allocative efficiency) and designing regulations in most cost-effective manner

Front 29

Clinton’s Executive Order 12866

Back 29

Applicable to any “significant regulatory actions,” including those expected to have an
annual impact of at least $100 million

Front 30

Economic Analysis (EA)

Back 30

A requirement under Executive order 12866 and executive order 13258 that calls for information on the benefits and costs of a significant regulatory action

Front 31

Bush’s Executive Order 13258

Back 31

-Makes only minor amendments to Clinton’s Executive Order 12866
-Extends the use of economic criteria in policy design and evaluation through an Economic
Analysis

Front 32

Regulatory Impact Analysis (RIA)

Back 32

This kind of analysis was used on Lead In Gasoline and produced the following results:

-Estimated incremental benefits included health effects and nonhealth effects, such as increased fuel economy

-Estimated incremental costs were estimated using an engineering cost model of the
refinery industry

-The resulting PVNB over the 1985 - 1992 period (excluding blood pressure effects) was estimated to be $5.9 billion ($1983)and supported the proposed new lead standard