CostBenefit Analysis and Environmental DecisionMaking Economics Production Distribution

Cost-Benefit Analysis and Environmental Decision-Making • Economics – Production, Distribution, Consumption of Goods and Services. • Every Economic Decision Involves Trade-offs – How to allocate goods and services – In the Market, generally many transactions • Knowledge -> Price – In Regulations: Knowledge Problem • Impossible for regulators to know all relevant information! • Setting “Prices” is difficult!

Cost-Benefit Analysis • Analytical (“quantitative”) way to make societal or business decisions • EO 12866 – CBA required prior to enacting major regulations. (Executive order from the president) • How it works: – Establish base situation (do nothing) – Establish time period – Compare alternatives – Choose policy with greatest overall benefit – In Economic Terms: Marginal Benefit=Marginal Cost

Cost-Benefit Analysis • Problem: Evaluation and Quantification of Each Cost and Benefit – Coal Power Plant Example • Internal cost: Usually “easy” to calculate (coal) • External cost: Usually “harder” to calculate (pollution) • Secondary Effect: Not a Cost! (increased cost of making toys due to higher electric cost)

Cost-Benefit Analysis of Coal Mining Red Curve = Supply Black Curve = Demand

Cost-Benefit Analysis • In general, there are many costs and many benefits • Recommended Approach for Cost-Benefit Calculations in Environmental Regulation: – Use Uniform Standards – Clearly State Assumptions – Rate Reliability of Data – Estimate Short and Long Term Benefits and Costs for ALL Groups Affected – Compare Several Options – Present Analysis as a Range of Values

Cost-Benefit Analysis of Pollution Reduction How is Placement of Demand Curve Set?