This document summaries all relevant material from the lectures and other videos for this course. It also contains my personal notes (in blue).This document has roughly 50 pages and is all the theoretical information you need for CBA.
Cost Benefit Analysis and Environmental
Valuation
AEP 32306
Script
Anneli Janzer
,Contents
Introduction............................................................................................................................................. 1
Intro to CBA ......................................................................................................................................... 1
CB-Scenarios ........................................................................................................................................ 1
CB Perspectives ................................................................................................................................... 1
Scoping .................................................................................................................................................... 1
Welfare measures / Introduction to Environmental Evaluation ............................................................. 3
1. Rationale behind an economic valuation exercise ...................................................................... 3
2. The ethical foundations of economic valuation .......................................................................... 3
3. The concept of economic value................................................................................................... 4
4. The concept of indirect utility ..................................................................................................... 5
5. Welfare measures (equivalent and compensating variation) and their relation to property
rights .................................................................................................................................................... 6
6. Economic Valuation Methods ..................................................................................................... 8
Contingent Valuation .............................................................................................................................. 9
Definition and Popularity .................................................................................................................... 9
Purpose and structure of CVM questionnaire..................................................................................... 9
Biases and frequent problems .......................................................................................................... 12
Welfare measures and their measurement ...................................................................................... 12
Choice Experiments(CE) ........................................................................................................................ 13
Definition and reasons for use .......................................................................................................... 13
Designing a choice experiment study................................................................................................ 14
Experimental design .......................................................................................................................... 15
Economic model and estimation ....................................................................................................... 16
Discounting ............................................................................................................................................ 17
Market prices and Changes in the Producer Surplus ............................................................................ 19
Calculating k-shift .............................................................................................................................. 20
General model: n countries and n regions ........................................................................................ 25
Distributional Issues .............................................................................................................................. 28
Risk and uncertainty 1 ........................................................................................................................... 30
Risk and uncertainty 2 ........................................................................................................................... 33
Estimating demand curves .................................................................................................................... 37
Exogeneity problem .......................................................................................................................... 37
Estimation of a demand equation ..................................................................................................... 37
Mean aggregated demand ................................................................................................................ 38
Elasticity............................................................................................................................................. 38
,Travel cost method................................................................................................................................ 39
Zonal travel cost and individual travel cost (ZTCM and ITCM) .......................................................... 40
Individual travel cost Method ........................................................................................................... 42
Annex ..................................................................................................................................................... 43
Contingent Valuation example Questionnaire .................................................................................. 43
Cheap talk .......................................................................................................................................... 45
Example Video on Youtube ............................................................................................................... 46
Tutorial Stata on campus....................................................................................................................... 47
, Introduction
Intro to CBA
• You need to compare projects to others, with which you
could make more money
• Financial CBA: maximizing profits, only look at money
• Economic/Social CBA: looks at larger economy and other
stakeholders
o Uses not the market price, but shadow prices
CB-Scenarios
• Cost-Effective analyses, e.g. health or education
• Which aspects are separable and can be analyzed on their own
• A project is the smallest separable investment unit that can be planned, financed and implemented
independently
• Look at every possible scenario to know where to spend your money with
CB Perspectives
• Private firms
o Usually work for their own benefit and want to maximize the money they can make
o Costs: e.g. wages to employees, renting or purchasing equipment or taxes
o Benefits: interests from their investments or revenues or government subsidies
• The bank
• The government
o To tax vs to subsidize
• Society
o Even though non-market goods might not have a direct monetary value, society can profit from them
and a loss would mean a loss of benefit, which is why they have to be included into the Analysis
o In a market, sometimes the price does not reflect the value of a product for society
→ adjustments need to be made to account for distortion
Scoping
= political context and setting
• Political
• Temporal
• Societal
boundaries
CBA in the policy cycle
1
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