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    Cost Benefit Analysis

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    Carlos Ferreira
    This document discusses cost-benefit analysis for evaluating investment projects and environmental policies. It describes how cost-benefit analysis accounts for both market and non-market costs and benefits over time using discounting. The example applies cost-benefit analysis to evaluate the opportunity costs of conserving biodiversity in an Indian coffee growing region by comparing the net present value of cultivating coffee versus conserving forest land. It finds that the high market value of coffee results in a high opportunity cost of conservation, even after accounting for external costs to farmers from wildlife.

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    Cost Benefit Analysis

    Uploaded by

    Carlos Ferreira
    1K views21 pages
    This document discusses cost-benefit analysis for evaluating investment projects and environmental policies. It describes how cost-benefit analysis accounts for both market and non-market costs and benefits over time using discounting. The example applies cost-benefit analysis to evaluate the opportunity costs of conserving biodiversity in an Indian coffee growing region by comparing the net present value of cultivating coffee versus conserving forest land. It finds that the high market value of coffee results in a high opportunity cost of conservation, even after accounting for external costs to farmers from wildlife.

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    This document discusses cost-benefit analysis for evaluating investment projects and environmental policies. It describes how cost-benefit analysis accounts for both market and non-market costs and benefits over time using discounting. The example applies cost-benefit analysis to evaluate the opportunity costs of conserving biodiversity in an Indian coffee growing region by comparing the net present value of cultivating coffee versus conserving forest land. It finds that the high market value of coffee results in a high opportunity cost of conservation, even after accounting for external costs to farmers from wildlife.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    1K views21 pages

    Cost Benefit Analysis

    Uploaded by

    Carlos Ferreira
    This document discusses cost-benefit analysis for evaluating investment projects and environmental policies. It describes how cost-benefit analysis accounts for both market and non-market costs and benefits over time using discounting. The example applies cost-benefit analysis to evaluate the opportunity costs of conserving biodiversity in an Indian coffee growing region by comparing the net present value of cultivating coffee versus conserving forest land. It finds that the high market value of coffee results in a high opportunity cost of conservation, even after accounting for external costs to farmers from wildlife.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 21

    Environmental Vauation

    Cost-Benefit Analysis

    03/03/09 Carlos Ferreira 1


    Cost-Benefit Analysis
    ● Social appraisal of investment projects
    ● Attempts to appraise investment projects in
    ways that correct for market failure
    ● Accounts for consequences stretching over
    future time:
    - Future market benefits
    - Future market costs
    - Future positive externalities
    - Future negative externalities

    03/03/09 Carlos Ferreira 2


    Intertemporal Welfare Economics
    ● Socially optimal (Pareto efficient) decision
    sought after (Kaldor-Hicks)
    ● Must achieve efficient allocation of resources
    over time
    ● Utility not measurable, but a function of
    consumption
    - How is total consumption divided between the
    individuals during the time period?
    - Total consumption levels in each period
    03/03/09 Carlos Ferreira 3
    The “standard case”

    ● Development vs Conservation
    ● Development has well defined societal benefits
    (B) and costs (C)
    ● Conservation has a number of benefits not
    priced in markets – loss is a cost (EC)
    ● Project given “go-ahead” if
    ∑(B) > ∑(C)

    03/03/09 Carlos Ferreira 4


    Method (1)
    1.Choose a discount rate (real rates, adj. for inflation)
    ● Marginal rate of return on the investment
    ● Consumption discount rate

    ● Some “standardized” social discount rate

    2.Calculate the Present Value of Market-Based Costs (Ct):


    PVC = ∑(Ct/(1+r)t)

    3.Calculate the Present Value of Market-Based Benefits (Bt):


    PVB = ∑(Bt/(1+r)t)

    03/03/09 Carlos Ferreira 5


    Method (2)
    4.Determine the value of foregone, Non-Market Environmental
    Benefits – Environmental Cost of the Project (ECt)
    TC, HP, CV

    NOTE - EC depends of time as well (Krutilla-Fisher model):


    ● Substitution possibilities of extracted goods

    ●Technical progress

    ● Income elasticity of demand for environmental goods

    5.Calculate NPV
    NPV = Bt – Ct – ECt

    6.Decision Rule
    NPV > 0 – proceed with development
    NPV < 0 – don't develop (conservation)

    03/03/09 Carlos Ferreira 6


    Final Considerations
    ● Time frame: when calculating costs, the time
    variable must translate the period of impact, not
    of operation
    ● Sensitivity analysis: re-test for different discount
    rates, to see how robust is the analysis outcome
    ● Magnitude of result: due to uncertainty, a barely
    positive or barely negative CBA can't be trusted
    to decide whether to develop or not.

    03/03/09 Carlos Ferreira 7


    Example

    The e c o no m ic s o f b io d iv e r s ity c o ns e r v a tio n: a s tud y o f


    a c o ffe e g ro w ing re g io n in the We s te r n G ha ts o f Ind ia

    03/03/09 Carlos Ferreira 8


    The problem
    ● Economic forces drive are driving down
    ecosystems and biodiversity
    ● Tropical forests are being converted quickly,
    especially into agricultural land (66.8% of the
    total between 1981 and 2002)
    ● Biodiversity's value to society is not accounted
    for by market price – externalities
    ● Valuing the costs and benefits of conservation
    will allow appropriate policies to be enacted in
    order to conserve biodiversity
    03/03/09 Carlos Ferreira 9
    Objectives

    1.To estimate the opportunity cost of biodiversity


    conservation in terms of the coffee benefits
    foregone.
    2.To assess the external costs borne by the local
    community due to wildlife conservation.
    3.To analyse the local community’s willingness to
    pay for participatory biodiversity conservation
    and the socio-economic and other factors
    influencing the same.
    03/03/09 Carlos Ferreira 10
    Method, sample, data
    ● CV study
    ● 125 respondents, living in a village in the vicinity of
    a reserve forest, coffee plantation dominant activity
    ● Stratifies sample, according to size of owned land
    ● Discrete choice, “yes”/”no” to bids
    ● Opportunity cost of conservation
    ● Measure of damages caused by wildlife
    ● Measure of transaction costs in claiming
    compensation for wildlife-caused damages
    03/03/09 Carlos Ferreira 11
    Opportunity Cost of Biodiversity Conservation

    ● Coffee is the main competitor for land use

    03/03/09 Carlos Ferreira 12


    NPV of Cultivating Coffee
    ● 2 types of coffee (Arabica vs Robusta)
    - grown in different areas
    - very different yields
    - very different market prices
    ● “Internal” costs of agriculture: establishment,
    recurring
    ● “External” costs of defence from wildlife
    ● Life-span: 50 years
    ● Discount rates: 8%, 10% and 12%
    03/03/09 Carlos Ferreira 13
    Costs faced by
    farmers

    03/03/09 Carlos Ferreira 14


    NPV of Cultivating Coffee

    03/03/09 Carlos Ferreira 15


    Sensitivity Analysis

    03/03/09 Carlos Ferreira 16


    External Costs

    03/03/09 Carlos Ferreira 17


    Transaction Costs of Claiming Compensation for Wildlife
    Attacks

    03/03/09 Carlos Ferreira 18


    WTP for Conservation

    Reasons (general) Reasons (elephants)


    ● Future generations (36%) ● Existence value
    ● Livelihood function (26%) ● Aesthetic value
    ● Ecosystem functions (25%) ● Livelihood function
    ● Option value
    03/03/09 Carlos Ferreira 19
    Conclusions
    ● Authors don't compute benefits of conservation
    ● They take the high benefits of coffee and compare it to its costs
    ● Opportunity cost of conservation is high...
    ● … since the benefits of coffee are very high...
    ● … even considering external costs and transaction costs
    involved in compensation
    ● The cost of conservation is directly linked to the market price of
    coffee.
    ● Policy-wise, changing the rules for obtaining compensation
    might help conservation
    ● It is possible to have a reasonable WTP but be disincentivized
    towards it at the same time
    03/03/09 Carlos Ferreira 20
    References

    ● Ninan, K. N., Sathyapalan, J. (2005). The economics of


    biodiversity conservation: a study of a coffee growing region in
    the Western Ghats of India. Ecological Economics, 55, pp. 61-
    72.
    ● Perman, R., Ma, Y., McGilvray, J., Common, M. (2003). Natural
    Resource and Environmental Economics. Essex: Pearson
    Addison-Wesley.

    03/03/09 Carlos Ferreira 21

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