Download Economic Evaluation on Green Architecture System

Economic Evaluation on Green Architecture System
Luo Fuzhou Liu Xiaojun Tang Xiaoling
School of Management
Xi’an University of Architecture & Technology, P.R.China, 710055
Abstract It should be very important to properly evaluate the economic effect of green architecture
system. The authors study the applicability of cost-benefit evaluation approaches on the green
architecture system, in order to establish a system with high efficiency, good circulation and lower
pollution under the guideline of sustainable development of social economy.
Key words Green architecture, Benefits, Costs
1 Introduction
It is necessary to evaluate the situation and changing economic effect of the green architecture system,
in order to estimate its influence on the economic activities of human society, to evaluate technical
alternatives for architecture with consideration of environmental factors, and to put forward
measurements for establishing the green architecture system. Modern economics has provided the
evaluation of green architecture system with a set of useful and optional methods for analysis.
From the view of macroeconomics, man could not reduce the risk of pollution to zero because of the
material benefits of modern economic system. Man should produce substance for survival, and even
enlarge the production and develop for better living. Under particular technical conditions, however, the
more production human has, the more pollution there is. Therefore, man must make his choice between
the economic benefits and pollution, with proper analyzing methods in which cost-benefit evaluation
would be a useful one.
From the point of architecture, habitation is one of the basic needs for human survival. Within a period
of particular technical and economic conditions, it is inevitable that modern buildings, with high-rise,
high density, high energy consumption and high evacuation, would have negative influence on the
environment, resources, landscape of cities, and physiology, psychology, culture and arts of human
being. Therefore, man should make decisions between green architecture with lower pollution, high
efficiency and good circulation, and isolated buildings with large areas of reinforced concrete.
2 Static Cost-Benefit Analysis
The criterion in economics, for selecting from alternatives of resources allocation at the same time, is
called static efficiency. The resources allocation is satisfied the criterion means that it makes the
maximum net benefit from the allocation of resources.
The benefit could be gotten from the demand curve of a particular resource, showed in Fig.1. The
demand curve is defined as the relationship between the price of the good and the amount or quantity the
consumer is willing and able to purchase in a specified time period, given constant levels of the other
determinants—tastes, income, prices of related goods, expectations, and number of buyers. Each point
on the curve represents the amount of money that consumer is willing and able to pay for the last unit of
the good or service. So the total amount of money paid by consumers for n units of the good is the sum
of the money that consumer is willing and able to pay for the first, second, …, and the nth unit of the
good. Suppose the demand curve is continuous, the total amount would be the area from 0 to n under the
demand curve. And we defined the total amount of money willingly paid as the total benefits.
We could show the opportunity cost in the same diagram. There is always opportunity costs for the
environmental resource even without investment of human resource or matter. The opportunity cost of a
resource means the value of the next-highest-valued alternative use of that resource. For example, the
landscape of Three Gorges could be famous scenery for appreciation, or the waterpower could be used
for generating electricity. However, these two functions would not be compatible because generating
electricity needs to build dams which would ruin the natural landscape. Therefore the opportunity cost
for generating electricity is the wreck of natural scenery. The marginal cost curve usually represents the
additional opportunity cost of producing just one more unit of output. In a pure competition market, the
Price
Supply
Demand
0
Quantity
marginal opportunity cost curve is equal to the supply curve.
Figure 1
The total cost is the sum of marginal cost, which means all the amount of producing from the first to the
last output. Suppose the marginal cost curve is continuous, the area under the curve and from origin to n
would be the total cost.
Net benefit is the part deducting the total cost from the total benefit. As shown in Fig.1, the net benefit is
the area under the demand curve and over the supply curve. Pareto optimality is the most efficient
allocation of resources, which is also the output maximizing the net benefit. Obviously, the most
efficient allocation of resources occurs when the marginal benefit is equal to the marginal cost.
Allocating resources of green architecture by market system is the most efficient way, as the prices of
the resources exist, whereas the private firms would make decisions just according to the private costs,
not the public costs, as the market system is invalid. For example, a high-rise building in a city with
famous history, would be great potential profits coming from the high plot ratio for the real estate
developer, whereas it would be large costs caused by the destroy of scenery and the tourism for publics.
Public decision-making hereby should consider the total social costs.
The total social cost for establishing green architecture system is the total opportunity cost for the
publics engaged in the activities, which is equal to the private cost plus the external cost.
Social Cost = Private Cost + External Cost
The external cost means the social cost caused but not undertaken by the private activities. For example,
it would be a part of the social cost that a high-class apartment built on a green lot of a city causes
damage to the public space for entertainments. The cost would be the external cost because it is not
undertaken by the developer.
The total social cost and the marginal social cost must be taken into account for making proper decisions
for the publics.
Marginal Social Opportunity Cost (MSOC)=Marginal Private Cost (MPC)+Marginal External Cost (MEC)
The marginal social cost curve is the social supply curve which is equal to the social cost for producing
just one more output. The total social output is decided by the social willingness to pay (WTP) that is
the expected social benefit from producing just one more output -- the marginal social benefits which
equals to the marginal private benefit plus or minus the marginal external benefit.
MSB = MPB +/- MEB
MSB stands for the marginal social benefits, and MPB for the marginal private benefit and MEB the
marginal external benefit. For example, the MEB would be plus if MSB of education is larger than MPB.
MSB is generally the demand curve which represents for the social willingness to pay of purchasing just
one more output.
MSOS = SS
MSB = MWTP = DS
MWTP stands for the marginal willingness to pay, and DS for the demand of society, while SS stands
for the supply of society. DS and SS will decide the equilibrium price that is the social full cost price.
The marginal external cost could be further divided into the marginal user cost and the marginal
environmental cost, thus the marginal social cost comprises the marginal private cost (MPC), the
marginal user cost (MUC) and the marginal environmental cost (MEC’):
MSOC = MPC+MUC+MEC’
The marginal user cost means the cost of using non-generation resources now instead of remaining for
future generations.
It is necessary to take into account the social demand and supply for determining the full cost price of
green architecture system, which would not equal to the private demand and supply. And the private cost
(SS’) and the social net benefit are always lower than the social cost (SS) and the private net benefit
respectively, while the environmental pollution exists, as shown in Fig.2. The private firms would
decide to produce more output with pollution for the same reason, and thus increase the resources
wasted and environment polluted.
Price
SS
SS’
Supply
Demand
0
Quantity
Figure 2
3 Dynamic Cost-Benefit Analysis
The static cost-benefit analysis is very useful for selection from different resource allocation alternatives
if the period under consideration is very short or the time factor is not very important. The problems in
reality, however, are involved in far future so that the allocation alternatives should be compared on the
different time points. For example, with the time goes by, the contamination would accumulated,
non-regeneration resource would decrease once being developed, and over-consumption of regenerative
resource would influence the speed and quantity of regeneration. All of these would affect the future of
human being.
It is necessary to analyze alternatives occurring in different time with the dynamic cost-benefit approach
to evaluate the influence of time. The most widely used method is the net present value method, which
is to calculate all cash flows over time back towards the current point in present time with an discount
rate to adjust for time and risk, and result in the net present value (NPV) by subtracting the initial
investments.
n
NPV = ∑
i =0
Bt
(1 + i ) n
In the above formula, i stands for an interest rate or discount rate, Bt stands for the net benefit at t point.
We can define the dynamic cost-benefit analysis with the concept of discount rate. An allocation
alternative of resource over several terms is efficient if its NPV is largest among all the other
alternatives.
For instance, if given: (1) the marginal cost for developing green architecture is constant, say RMB4 per
unit; (2) the resource quantity of supply over two terms is constant; and (3) the demand function over
two terms is constant, showing in formula p=16-4q, in which q stands for the developing quantity.
If the total supply quantity of resource is 60 or more, then the efficient allocation is to develop 30 each
in the two terms. The supply would satisfy the demand of two terms that the development in the first
term would not affect that in the second term. Under such circumstance, the static cost-benefit analysis
could meet the need for solving the problem because time is not an important factor for decision, as
shown in Fig.3.
If the total supply quantity is lower than 60, say is 40, the scarcity of resource over two terms will occur
and it is necessary to solve the problem with the dynamic cost-benefit analysis.
Price
Price
4
MC
0
4
Quantity
MC
0
Quantity
The First Term
The Second Term
Figure 3
Suppose we randomly select the quantity of the first term is 30, and the next one is 10, how should we
calculate the NPV for the allocation? The present value of net benefit for the first term is the area
between 0 to 30 and under the demand curve and above the supply curve, that is, (1/2) X (16-4) X
30=180. The present value of net benefit for the second term is the area between 0 to10 and under the
demand curve and above the supply curve, divided by (1+i), and suppose i = 10%, then the present value
of net benefit of the second term is: (1/2) X (16-4) X10 / (1+10%)=54.55. Therefore, the total present
value of net benefit is equal to 234.55.
Although we can calculate the NPV, is the allocation above an optimal one? How can we find an optimal
allocation? Of course, we can calculate all the NPV for each alternative with different quantity of the
first (q1) and second (q2) terms, and select the largest one.
But man could find much easier way to solve these problems in the light of principle of economics. The
efficient dynamic allocation of resource should meet the condition that the present value of the marginal
net benefit for the first term is equal to that of the second term, as shown in Fig.4.
Marginal net benefit
for the first term
Marginal net benefit
for the second term
Marginal
NPV
for the first term
12
Marginal NPV for
the second term
A
Quantity for
the first term
10.91
B
0
10
40
30
C
D
20
20
30
40
10
0
Quantity for the
second term
Figure 4
The line of the marginal NPV for the second term is not symmetric with that line for the first term since
the one for second term should be discounted with an interest rate. The intersection point of the line in
the second term and the right vertical axis, therefore, is lower than the point of that line in the first term
and the left vertical axis. If the discount rate is 10% and the first quantity is 0, then the second NPV will
be 12 / 1.10 = 10.91. The line of the marginal NPV for the second term will intersect the horizontal axis
with the point of 30, as the second quantity 30 will make the net benefit and hence its present value zero.
So a higher discount rate will make the line of marginal NPV for the second term rotate around the point
(0, q2=30) and become more flat.
Thus, the intersection point of the two lines of marginal NPV in two terms will be the optimal point of
allocation. The total NPV will be the area under the left line plus that under the right one of that
intersection point. The total NPV, that is, the area of A+B+C+D, would be maximized by the efficient
dynamic allocation alternative.
The discount rate would affect the marginal user cost and the allocation of resource between the two
terms. A discount rate above zero would make the quantity of the first term larger than that of the second
one. If the discount rate above 0.10, the second line of marginal NPV will even rotate right so that the
first quantity will increase while the marginal user cost decrease. Therefore, the increasing of discount
rate will result in the decreasing of future weight and the increasing of the developing quantity in the
first term.
4 Conclusion
From the above discussion, we would have conclusions that the cost-benefit analysis could be applied to
the evaluation of establishing green architecture system, and take the total social cost into account for
public decision-making. Furthermore, dynamic cost-benefit analysis should be used when the
alternatives of resource allocation involved long terms or over time.
References
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Boston College Environmental Affairs Law Review, 2004, 31(3): 591-606
[2] Liu Qibo, Zhou Ruoqi. Study on Regional Evaluation of Green Residential Area Construction.
Architect, 2003, 01: 44-47 (in Chinese)
[3] Wang Zhu, He Yong, et al. Study on Evaluation Tool of Green Settlement. Journal of Zhejiang
University (Engineering Science), 2002, 36(6): 659-663 (in Chinese)
[4] Zhou Ruoqi, Zhang Shuping, et al. Green Architecture. Beijing: China Planning Press, 1999.6 (in
Chinese)