Valuation Philosophy3.2
8. DIFFICULTIES IN APPLYING BCA IN ENVIRONMENTAL POLICY ANALYSIS
8.1 Conceptual Difficulties with BCA
8.1.1 Anthropocentricity
BCA is explicitly an anthropocentric (people-centered) tool. The values that it includes are those that people have; it does not take into account intrinsic values associated with the natural world that are not derived from people. BCA is a people-based tool because people do it, and it is a decision-making tool for people. While it might not be impossible in theory for people to take into account other, non-human values, in practice there is no accepted way to measure those values independently of the values that people give them.
Thus, if people do not care about protection of a particular species, the benefit of its preservation, in the BCA framework, would be zero.
However, it cannot be overemphasized that, if people value something, that something should be (and will be) included in the BCA. To the extent that people will speak for the intrinsic values of nature (and are willing to put their money where their mouths are), those values will appear in the calculation of nonmarket benefits.
8.1.2 Distributional Effects
A benefit-cost analysis is designed to determine the net benefits to society of an alternative. If the benefits of a policy exceed the costs, it is possible in principle for everyone to gain from that activity and for nobody to lose, through appropriate allocation of the benefits and costs across all of
society. Of course, the fact that it is possible for everyone to gain does not mean that the necessary redistribution will in fact take place. Instead, a policy may benefit some groups at the expense of others.
For instance, protecting the northern spotted owl is estimated to produce benefits to people in the U.S. that exceed the costs of owl protection (specifically, the timber made unavailable for harvest by protecting the owl). However, for the timber workers who lost their jobs due to those reductions in timber harvest, protecting the spotted owl did not provide them with any benefits. As part of the plan to protect the spotted owl, retraining programs were provided to the displaced timber workers as partial compensation for their lost jobs. In this case, federal tax money (collected from the general population of the U.S., who benefited from protecting the owl) was used to reduce the pain to those who disproportionately bore the costs of owl protection. If the compensation had not taken place, there clearly would have been winners and losers. For those who lost, the fact that the net benefits were positive would almost certainly not have convinced them to support owl protection.
Typically, a BCA does not consider the distributional effects of a policy.
Those distributional effects are critical for understanding who supports and who opposes different alternatives, and they often explain why some more efficient policies cannot be enacted. In addition, any decision-maker who does not consider the effects of a policy on interested groups is unlikely to stay in power for very long. Thus, distributional effects can and do frequently override the recommendations that come out of a BCA.
However, if data and time permits, analyzing and displaying the distribution of benefits and costs among different groups can greatly improve the usefulness of the benefit-cost analysis to decision makers.
8.1.3 No Compromise: Trade-offs Among Non-Comparables A benefit-cost analysis is based on the premise that a project has both benefits and costs, and that tradeoffs between these benefits and costs can and should be made. All of us would like a clean, healthy environment if it cost nothing to have one; we have environmental problems because there are costs involved in protecting the environment. In most cases, many people are willing to give up some valued goods to protect the environment, but there is a point where they are unwilling to pay more for additional environmental protection. For instance, many people are willing to pay a few hundred dollars more for a car with an engine designed to reduce air pollution emissions, but they may not be willing to give up their car completely and find an alternative means of transportation. In these
situations, benefit-cost analysis can be an extremely useful tool for finding the right level of environmental protection.
In some environmental disputes, though, some people have a position staked out from which they are completely unwilling to move. For instance, a site might be sacred ground to a group of people; even if there is a billion-dollar gold deposit underneath it (and they would get the money), this group would accept no intrusion on the land. The implicit value of the site to them is infinite. In this case, a benefit-cost analysis will not influence their opinion; if the value of the site is infinite to them, its loss cannot be compensated. Indeed, it becomes conceptually difficult to conduct a BCA of developing a site if its value to the group truly is infinite, even if the value of other uses is also very high. For instance, suppose that the sacred site contains the only known deposit of a substance that is believed to have tremendous curative powers for some otherwise incurable human illnesses. Intrusion into the site would violate one group’s fundamental beliefs, but those who will die without the substance would be willing to give up everything they have to get access to it. A benefit-cost analysis in this context would be virtually meaningless to either side. In these highly painful situations, the best role that an analyst can provide is to outline all the benefits and the costs, with or without price tags, and provide that information to a decision-maker. Even though benefit-cost analysis may not be directly useful, some systematic analysis may be possible using professionals trained in environmental ethics.
8.1.4 Compensation Paradoxes
Since a Potential Pareto Improvement does not require that compensation actually be paid, major concerns have been voiced about reliance on BCA for public decision making. The equity and distributional issues have been discussed above. Additional concern results from the possibility that implementing the new policy might change the relative prices of goods and income levels that influence individuals’ willingness to pay. For example, a move from a situation where salmon are scarce and hydropower plentiful to an alternative situation where salmon are plentiful and hydropower is scarce could change relative prices of salmon and hydropower. In addition, the income of commercial anglers relative to owners and workers in businesses which use large amounts of electricity would likely change. If the effect of the policy was so widespread that relative prices or incomes substantially changed, then the desirability of the policy might change depending on whether we evaluate it using the original set of prices and incomes or the set of prices and incomes occurring with the change. This is what is referred to as a compensation paradox.
There are a couple of responses to this concern. First, most environmental policies make such small changes in the market supplies of goods or factors of production that relative prices or overall factor income shares rarely change. Thus the possibility of a compensation paradox is unlikely except for national policies having a substantial effect on multiple sectors of the economy. Second, in comparing an inefficient bundle of resource uses to an efficient bundle (i.e., a bundle that provides more of one resource and no less of another), the compensation paradox may not occur.
The interested reader should see Just, Hueth and Schmitz (1982:38) for a more detailed discussion regarding the resolution of the compensation paradox.
8.1.5 Theory of Second Best
The purpose of BCA is to recommend projects, policies or programs that make people better off, i.e., represent an improvement in economic efficiency. In BCA we evaluate the economic efficiency of just the resources affected by the proposed policy. If the BCA indicates that we should allocate more water from agriculture to instream flow, then implementing such a recommendation would be thought to improve economic efficiency of the entire economy. That is, we have improved economic efficiency in use of recreation and fisheries and not negatively affected any other resources elsewhere in the economy (i.e., steel production, housing construction, clothing, etc.).
But the theory of second best (Lipsey and Lancaster, 1957) postulates that, if there are inefficiencies elsewhere in the economy, improving economic efficiency in one part of the economy will not necessarily increase social welfare. In other words, reducing economic inefficiency, as long as there are still some inefficiencies remaining, may not represent an improvement; there could be unintended consequences that reduce welfare.
If this theory of second best is always relevant, then we could not reach any conclusion on the desirability of any single environmental policy based on the information contained in a BCA as long as there were other industries or resources uses that remained economically inefficient.
Fortunately, re-evaluation of the theory of second best has shown that we need not be so pessimistic about recommending economically efficient uses of natural resources in an otherwise inefficient world. First, Mishan (1981:293) indicates that, any time we can produce the same bundle and level of output for less cost, there is an unambiguous gain to society.
Secondly, as Davis and Whinston (1965) have shown, if there is separability or independence between economically inefficient sectors of the economy and the ones under study in the BCA, we may be able to make
unambiguous statements about improvements in economic efficiency. For many small scale policy analyses there is often little connection between a particular set of firms in a given geographic location and numerous other sectors of the economy (i.e., clothing, steel production or housing construction, etc.). Thus, concerns over second best need not preclude us from concluding that increased efficiency in environmental issues will improve social well being.