Download CBA Handout

IES1001F - Environmental Decision Making, 2002
Resolving Conflicts and Making Tradeoffs
and
Cost-Benefit Analysis
Resolving Conflicts - Making Tradeoffs
Conflicts between achievement of objectives
Conflicts between stakeholders
Tradeoffs need to be made explicitly or implicitly to make a decision
Various Techniques for evaluation of alternatives, e.g.
Cost-benefit analysis
Multiobjective weighting
Ad hoc methods, etc.
Many arrive at a total value for each alternative - choose alternative with the highest
total value
Utilitarian approach - find the alternative that gives “the greatest good for the greatest
number”, i.e. Maximize “size of the economic pie”
Cost-Benefit Analysis
CBA based on “Utilitarianism”
Maximization of Economic Efficiency - efficient use of resources
CBA criterion:
Maximize Net Benefits = Benefits - Costs
To do this, need to:
- identify types of costs and benefits
- quantify the costs and benefits
- place monetary value on these
With time dimension: Criterion: Maximize Net Present Value
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Net Present Value (NPV) for Aj =
Example of Third London Airport
STEPS:
1. Identify Types of Costs and Benefits
2. Estimate Values of Costs and Benefits
a. first need to quantify amounts,e.g. how much travel time is saved,
b. then place $ value on them.
Financial (cash flow) vs. Economic Analyses
Market Values vs. Economic Values
- how much is an apple or muffin worth?
Valuation: Can use market prices in some cases, but ...
Need to Find “Shadow Prices” when either:
- economic value = market price
- no market exists
Valuation Criteria:
Opportunity Cost - the value of the resource in its best alternative
use.
For highway example:
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Time
Labour
Agricultural Land
Trees
Willingness to Pay - how much people would be willing to pay for
a “good or service” or to avoid it, or how much they would be
willing to accept as compensation.
For highway example:
Time
Labour
Agricultural Land
Trees
Noise – observe differences in property values in
noisy and in quiet areas
3. If time dimension, i.e. benefits and costs occur over time:
a. Choose time horizon, T
b. Choose discount rate for discounting of benefits and costs
Use of discounting formula and factors
$1 one year from now = 1.00/(1+r) = 0.9524 now if r = 5%
r = social time rate of preference
4. Calculate NPV
Use of discounting tables - handout
Example
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5. Choose alternative with highest NPV (or lowest Net Present Cost)
Tutorial problems
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Critique of / Issues with CBA:
Advantages of CBA
Disadvantages of CBA
Third London airport:
Buchanan Dissent
What happened
Other techniques to try to overcome CBA problems, e.g.
- Cost-Effectiveness
eg Lead Phase Down example
- Multiobjective ranking and weighting methods
e.g. Western Beaches Tunnel
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