IDEAS home Printed from https://ideas.repec.org/a/bpj/jbcacn/v3y2012i3n2.html

Benefit-Cost Analysis of Environmental Projects: A Plethora of Biases Understating Net Benefits

Author

Listed:
  • Graves Philip E.

    (University of Colorado at Boulder)

Abstract

There are many reasons to suspect that benefit-cost analysis applied to environmental policies will result in policy decisions that will reject those environmental policies. The important question, of course, is whether those rejections are based on proper science. The present paper explores sources of bias in the methods used to evaluate environmental policy in the United States, although most of the arguments translate immediately to decision-making in other countries. There are some “big picture” considerations that have gone unrecognized, and there are numerous more minor, yet cumulatively important, technical details that point to potentially large biases against acceptance on benefit-cost grounds of environmental policies that have true marginal benefits greater than true marginal costs, both in net present value terms. It is hoped that the issues raised here will improve future conduct of benefit-cost analyses of environmental policies.

Suggested Citation

  • Graves Philip E., 2012. "Benefit-Cost Analysis of Environmental Projects: A Plethora of Biases Understating Net Benefits," Journal of Benefit-Cost Analysis, De Gruyter, vol. 3(3), pages 1-25, August.
    • Handle: RePEc:bpj:jbcacn:v:3:y:2012:i:3:n:2
    DOI: 10.1515/2152-2812.1041
    as

    Download full text from publisher

    File URL: https://doi.org/10.1515/2152-2812.1041
    Download Restriction: For access to full text, subscription to the journal or payment for the individual article is required.
    File URL: https://libkey.io/10.1515/2152-2812.1041?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to look for a different version below or

    for a different version of it.

    Other versions of this item:

    References listed on IDEAS

    as
    1. Groves, Theodore & Ledyard, John O, 1977. "Optimal Allocation of Public Goods: A Solution to the "Free Rider" Problem," Econometrica, Econometric Society, vol. 45(4), pages 783-809, May.
    2. Nicholas E. Flores & Philip E. Graves, 2008. "Optimal Public Goods Provision: Implications of Endogenizing the Labor/Leisure Choice," Land Economics, University of Wisconsin Press, vol. 84(4), pages 701-707.
    3. Roback, Jennifer, 1982. "Wages, Rents, and the Quality of Life," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1257-1278, December.
    4. Kahneman, Daniel & Knetsch, Jack L & Thaler, Richard H, 1990. "Experimental Tests of the Endowment Effect and the Coase Theorem," Journal of Political Economy, University of Chicago Press, vol. 98(6), pages 1325-1348, December.
    5. Amos Tversky & Daniel Kahneman, 1991. "Loss Aversion in Riskless Choice: A Reference-Dependent Model," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 106(4), pages 1039-1061.
    6. Horowitz, John K. & McConnell, Kenneth E., 2002. "A Review of WTA/WTP Studies," Journal of Environmental Economics and Management, Elsevier, vol. 44(3), pages 426-447, November.
    7. Hahn, Robert, 2010. "Designing Smarter Regulation with Improved Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 1(01), pages 1-19, July.
    8. Hahn, Robert, 2010. "Designing Smarter Regulation with Improved Benefit-Cost Analysis," Journal of Benefit-Cost Analysis, Cambridge University Press, vol. 1(1), pages 1-19, July.
    9. Charles R. Plott & Kathryn Zeiler, 2005. "The Willingness to Pay–Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations," American Economic Review, American Economic Association, vol. 95(3), pages 530-545, June.
    10. Boyce, Rebecca R, et al, 1992. "An Experimental Examination of Intrinsic Values as a," American Economic Review, American Economic Association, vol. 82(5), pages 1366-1373, December.
    11. Graves Philip E, 2009. "A Note on the Valuation of Collective Goods: Overlooked Input Market Free Riding for Non-Individually Incrementable Goods," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-20, February.
    12. Paul R. Portney, 1994. "The Contingent Valuation Debate: Why Economists Should Care," Journal of Economic Perspectives, American Economic Association, vol. 8(4), pages 3-17, Fall.
    13. Blomquist, Glenn C & Berger, Mark C & Hoehn, John P, 1988. "New Estimates of Quality of Life in Urban Areas," American Economic Review, American Economic Association, vol. 78(1), pages 89-107, March.
    14. Hanemann, W Michael, 1991. "Willingness to Pay and Willingness to Accept: How Much Can They Differ?," American Economic Review, American Economic Association, vol. 81(3), pages 635-647, June.
    15. Edward Clarke, 1971. "Multipart pricing of public goods," Public Choice, Springer, vol. 11(1), pages 17-33, September.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Craig, Christopher A. & Feng, Song, 2016. "An examination of electricity generation by utility organizations in the Southeast United States," Energy, Elsevier, vol. 116(P1), pages 601-608.
    2. Graves, Philip E., 2017. "Global Climate Policy Will Have Net Benefits Larger Than Anyone Thinks (and Welfare Gains, Strangely, Are Likely To Be Much Larger Yet)," Ecological Economics, Elsevier, vol. 136(C), pages 73-76.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Philip E. Graves, 2010. "Benefit-Cost Analysis of Environmental Projects: A Plethora of Systematic Biases," CESifo Working Paper Series 3144, CESifo.
    2. Philip E. Graves, 2010. "Appropriate Fiscal Policy over the Business Cycle: Proper Stimulus Policies Can Work," CESifo Working Paper Series 3160, CESifo.
    3. Graves Philip E, 2009. "A Note on the Valuation of Collective Goods: Overlooked Input Market Free Riding for Non-Individually Incrementable Goods," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 9(1), pages 1-20, February.
    4. Andrea Isoni, 2011. "The willingness-to-accept/willingness-to-pay disparity in repeated markets: loss aversion or ‘bad-deal’ aversion?," Theory and Decision, Springer, vol. 71(3), pages 409-430, September.
    5. Biel, Anders & Johansson-Stenman, Olof & Nilsson, Andreas, 2011. "The willingness to pay–willingness to accept gap revisited: The role of emotions and moral satisfaction," Journal of Economic Psychology, Elsevier, vol. 32(6), pages 908-917.
    6. Tsur, Matan, 2008. "The selectivity effect of past experience on purchasing decisions: Implications for the WTA-WTP disparity," Journal of Economic Psychology, Elsevier, vol. 29(5), pages 739-746, November.
    7. Darla Hatton MacDonald & Mark Morrison & Mary Barnes, 2010. "Willingness to Pay and Willingness to Accept Compensation for Changes in Urban Water Customer Service Standards," Water Resources Management: An International Journal, Published for the European Water Resources Association (EWRA), Springer;European Water Resources Association (EWRA), vol. 24(12), pages 3145-3158, September.
    8. Beja Jr, Edsel, 2012. "Two explanations to the willingness to accept and willingness to pay gap plus an alternative," MPRA Paper 36239, University Library of Munich, Germany.
    9. Achilleas Vassilopoulos & Niki Avgeraki & Stathis Klonaris, 2020. "Social desirability and the WTP–WTA disparity in common goods," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 22(7), pages 6425-6444, October.
    10. Smith, Alec, 2019. "Lagged beliefs and reference-dependent utility," Journal of Economic Behavior & Organization, Elsevier, vol. 167(C), pages 331-340.
    11. Bodo Sturm & Joachim Weimann, 2006. "Experiments in Environmental Economics and Some Close Relatives," Journal of Economic Surveys, Wiley Blackwell, vol. 20(3), pages 419-457, July.
    12. Andrea Isoni & Graham Loomes & Robert Sugden, 2011. "The Willingness to Pay—Willingness to Accept Gap, the "Endowment Effect," Subject Misconceptions, and Experimental Procedures for Eliciting Valuations: Comment," American Economic Review, American Economic Association, vol. 101(2), pages 991-1011, April.
    13. Cropper, Maureen L & Oates, Wallace E, 1992. "Environmental Economics: A Survey," Journal of Economic Literature, American Economic Association, vol. 30(2), pages 675-740, June.
    14. Richard T. Carson, 2011. "Contingent Valuation," Books, Edward Elgar Publishing, number 2489, August.
    15. William S. Neilson & Michael McKee & Robert P. Berrens, 2013. "Value and outcome uncertainty as explanations for the WTA vs WTP disparity," Chapters, in: John A. List & Michael K. Price (ed.), Handbook on Experimental Economics and the Environment, chapter 6, pages 171-189, Edward Elgar Publishing.
    16. Kingsley, David C. & Brown, Thomas C., 2013. "Value learning and the willingness to accept–willingness to pay disparity," Economics Letters, Elsevier, vol. 120(3), pages 473-476.
    17. Simon Gächter & Eric J. Johnson & Andreas Herrmann, 2022. "Individual-level loss aversion in riskless and risky choices," Theory and Decision, Springer, vol. 92(3), pages 599-624, April.
    18. H. Spencer Banzhaf, 2017. "Constructing Markets: Environmental Economics and the Contingent Valuation Controversy," History of Political Economy, Duke University Press, vol. 49(5), pages 213-239, Supplemen.
    19. Malakhov, Sergey, 2012. "К Вопросу О Возможности Синтеза Концепции Удовлетворяющего Поиска И Неоклассической Доктрины [A note on the synthesis of the satisficing concept and the neoclassical theory]," MPRA Paper 49494, University Library of Munich, Germany.
    20. Susan Chilton & Michael Jones-Lee & Rebecca McDonald & Hugh Metcalf, 2012. "Does the WTA/WTP ratio diminish as the severity of a health complaint is reduced? Testing for smoothness of the underlying utility of wealth function," Journal of Risk and Uncertainty, Springer, vol. 45(1), pages 1-24, August.

    More about this item

    Keywords

    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;
    ;

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bpj:jbcacn:v:3:y:2012:i:3:n:2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Peter Golla (email available below). General contact details of provider: https://www.degruyterbrill.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.