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Video - Benefit: Cost Analysis
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Из курса от партнера University of Western Australia
Agriculture, Economics and Nature
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The economics of agri-environmental projects
Week 5 discusses the importance of extending economics beyond the farm gate, characteristics of agri-environmental projects, Benefit: Cost Analysis, and provides an example with Gippsland Lakes.
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Professor David Pannell, BSc(Agric), BEc, PhDHead of School of Agricultural and Resource Economics
University of Western Australia
Jacob Hawkins, BA(Biol), MESM, PhDSchool of Agricultural and Resource Economics
University of Western Australia
[MUSIC PLAYING]
Benefit-cost analysis is an important economic tool that
helps us to evaluate projects.
So I'm going to tell you about various aspects
of benefit-cost analysis here today,
starting with an outline of some of the elements
of benefit-cost analysis.
So first of all, we need to select a relevant time frame.
And we've talked about time frames
in a previous session, when we were looking
at evaluating a project from an individual farmer's
perspective.
But this time we're looking at a larger,
probably from a government or public perspective.
So that the time frame might be 20,
50, 100 years depending on the project.
Then we need to establish a benchmark.
And this is quite tricky.
This is about what would have happened
in the absence of the project that we're trying to evaluate.
We need to predict that.
Then we need to predict how would things be different
if we do the project.
And from that, what would be the benefits and costs that
result from the project, causing something
to change in the real world.
Then we need to convert those benefits and costs
into dollar terms in each year.
And then calculate present values,
and select those projects with the highest benefit cost ratio
until the budget's exhausted.
So that's the general approach we're going to take.
Now let's look a little bit more at some of the details.
So I want to focus on this issue of establishing a benchmark,
because it's really important.
That's an important way of thinking
about evaluating a project.
In this diagram, I'm showing over time
the benefits that arise from a particular project
to restore a piece of degraded environmental vegetation, say.
So in this case, in the absence of the project
we've made a judgment that the quality
of that piece of environment, that environmental asset,
would stay constant.
It's been degraded, and it would just
stay at about the same level of quality.
So its value wouldn't really change.
But if we do the project, then the condition
of the environment will improve a bit.
And so there'll be some benefit that occurs.
So the difference between those two lines over time
is the measure of the benefits in that particular year.
Here's a different example, though.
It's not necessarily the case that, if we do nothing,
then the environment will stay the same.
It's often the case, in fact, that in the absence
of some sort of management action,
the environment could degrade.
And that's what you can see with the red line in this case.
Over time the environmental asset
that we're representing here is getting worse.
And if we do the project, then there
is still some reduction in the environmental condition,
but it's not as bad as it would've been
if we hadn't done something.
So that blue line by the end of the time period
is actually a bit lower than it was at the start,
but it's higher than it would've been if we'd done nothing.
So the project does have some benefits.
So it's important to recognize that a project can
give benefits even if the condition
of the environmental asset is declining.
So that means this concept, this approach
of looking with versus without the project, is really crucial.
It's also worth recognizing that what we're doing here
is we're not trying to estimate the benefits by comparing
the environmental asset condition
before and after the project.
We're doing it with versus without the project.
These are really different concepts,
and they can give quite different results.
With versus without is what matters, not before
versus after.
Here's another example where the environment is degrading
in the absence of the project, but with the project in place
it actually improves.
So we've got a combination of protecting
this environmental asset and restoring it.
So it's a nice example.
And in this case the benefits are much bigger
than we've seen in either of the previous two examples.
But it's also worth observing that the benefit that we want
to recognize as being attributable to the project
is only the difference between the with-project and
without-project example.
It's not the full benefits that an environmental asset
generates.
We don't represent the benefits as the height
of the blue line above zero.
It's only the height of the blue line above the red line.
So you don't want to trick yourself
into thinking that the project is better than it really is.
OK.
The next thing I want to talk about is a bit different.
This is about converting those benefits
into some sort of value that we can use
in the benefit-cost analysis.
So this is not necessarily straightforward.
Converting some of the environmental and social
benefits into a currency value, a dollar value,
can be quite tricky.
And a great example of that is trying
to put a dollar value on biodiversity benefits.
It's really a tricky thing to do.
And there are a number of options
that people use to attempt to represent
these benefits in an evaluation, whether it
be a full blown benefit-cost analysis or some sort
of simplified version.
So one approach that some people use
is to quantify the benefits in biological terms
and to leave it at that, not to make any attempt
to convert those into dollar values.
And in some situations that can be quite a reasonable thing
to do, particularly if you're trying
to compare biological values from different projects
that are essentially similar.
If you're looking at different versions of a project
that all are trying to improve the habitat for birds,
then it's not too bad to leave those
as some representation of benefits for birds
and not worry about what they might be worth in dollars.
And just recognize that there are some inherent weaknesses
in that, but you're avoiding some of the difficulties
of converting it to dollars.
Another approach that's sometimes used
is a scoring system of the benefits.
And that helps you to compare projects that might
be a little bit more different.
And usually that's done by some experts judging the benefits
and assigning scores to them.
The next common approach is a deliberative process.
This approach is like citizens' juries or just expert judgement
that try and assign some dollar value
to an outcome, an environmental or social outcome, just based
on a gut feeling or on an expert judgement well-informed
by all the information that's available.
And the final approach is one that environmental economists
would generally probably prefer.
And that's non-market valuation.
So these are methods that have been developed by economists
to try and put dollar values on these tricky environmental and
social outcomes.
And there's a variety of approaches
that are used, some based on surveys,
some based on observing the behavior of people
in the real world.
And so again, there are strengths and weaknesses
of this approach, just like there are to all the approaches
that I've talked about here.
And which one you would prefer in a particular case
is a matter of judgment.
So it's worth spending some time learning
about each of these approaches and their strengths
and weaknesses, so that you can judge
which is the best approach to use in a particular case.
So in summary, benefit-cost analysis
is a widely-used tool to evaluate potential projects.
It requires the comparison of outcomes with
versus without the project.
And that's an approach that is very important.
A lot of approaches for evaluating projects
actually don't do that.
And they are really seriously flawed in many cases
if they don't do that.
And then we talked briefly about a variety of approaches
to try and put values, represent the values
of the environmental benefits that come out
of these types of projects.
[MUSIC PLAYING]
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