Environmental Decisionmaking

Problem Set 6

1) (4 pts) Explain, in your own words, the difference between willingness to pay and willingness to accept compensation. Why is this distinction important for cost-benefit analysis? Think of an example where a cost-benefit analysis done based upon willingness to pay might create a clearly unreasonable outcome.

2) (2 pts) Explain, in your own words, how economists calculate the value of a human life. Is this number closer to a measure of "willingness to pay" or "willingness to accept compensation"?

3) (4 pts) In the reading by Bishop and Welsh (in the reader as one of the "Better Environmental Decisions" readings), the authors discuss an example of Contingent Valuation used in policy development for the Glen Canyon Dam. The study indicated that the American public would be willing to pay almost $3.5 billion per year to ensure that the Dam was operated in the most environmentally sensitive way. That is about ten times the value of the electricity produced by the dam (assuming that it operates at peak capacity and replacement costs would be about 3 cents per kilowatt). How do you feel about the accuracy of this number? Assume for a minute that there was no way to operate the dam in a more environmentally sensitive manner. Since the recreational value of the reservoir is relatively small, this figure would indicate that people might rather have no dam at all then one operating in an economically efficient manner, and so we should tear the dam down. Discuss this, and whether you agree that it is a reasonable interpretation of the data.

4) (4 pts) The Pearce paper (Auditing the Earth) mentions "the 'demonstration-capture' paradigm formulated by economists," and states: "demonstration without capture is clearly insufficient." What do they mean here? This is, in fact, a very important statement. Can you think of examples where the absence of "capture" did not prove to be insufficient? Should we grant Pearce this claim?

5) (4 pts) Costanza et al. calculate that over half of the value of global ecosystem services comes in the form of nutrient cycling (i.e. breaking down dead things into their constituents so that growing things can gain nourishment from them). But there is nothing particularly interesting about nutrient cycling, and it is not difficult to imagine a simple chemical process which would do the same thing. If we accept the Costanza number, however, then it means that someone could invent a process that would cycle nutrients in a large, stinking vat, and suddenly the value of all the world's oceans, parks, wildlife, soils, grasslands, and forests would fall by half (assuming the process was cheap). And yet, it is not at all uncommon in valuation studies to see large values like this for things that we would not, perhaps, agree with at first (or even after reflection). Discuss this comment, and whether the 17 trillion for nutrient cycling calls into question Costanza's overall figure.

6) (2 pts) Discuss the politics of cost-benefit analysis. Knowing what you know about how ecological-economic values are determined, why do you think that most environmentalists oppose the use of CBA, and most industry groups favor it? Asked another way, how do you think cost-benefit analysis, or the absence of cost-benefit analysis, could be used politically to systematically further the agenda of a particular ideology? Is this a danger that outweighs the benefits of "rational policymaking"?