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On the Formulation of the Alternative Scenario in Cost-Benefit Analysis

Author

Listed:
  • Johansson, Per-Olov

    (CERE - the Center for Environmental and Resource Economics)

  • Kriström, Bengt

    (CERE - the Center for Environmental and Resource Economics)

Abstract

In this note we discuss how a cost–benefit analysis could be formulated in a second-best world where lump-sum taxation is not available. The question is how the government’s budget is balanced. Different options are available. A value added tax or an income tax or a profit tax could be adjusted so as to balance the budget. Alternatively, expenditures on public or private goods are displaced. A variation occurs if the government has a policy target. For example, a certain number of hectares of valuable forest areas should be preserved. Then, the central part of a cost–benefit analysis is to compare the costeffectiveness of different policy instruments that can be used to achieve the target. However, there are also deadweight losses provided there are distortionary taxes. Such considerations also opens up for a broader formulation of the valuation question in willingness-to-pay experiments than one based on lump-sum taxation.

Suggested Citation

  • Johansson, Per-Olov & Kriström, Bengt, 2019. "On the Formulation of the Alternative Scenario in Cost-Benefit Analysis," CERE Working Papers 2019:6, CERE - the Center for Environmental and Resource Economics.
  • Handle: RePEc:hhs:slucer:2019_006
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    More about this item

    Keywords

    Cost–effectiveness; cost–benefit analysis; second best; policy targets; deadweight losses; forestry; conservation; contingent valuation; choice experiments.;
    All these keywords.

    JEL classification:

    • H41 - Public Economics - - Publicly Provided Goods - - - Public Goods
    • I39 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - Other
    • Q23 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Renewable Resources and Conservation - - - Forestry
    • Q57 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Ecological Economics

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