Accounting for Income and Population Dynamics in Benefit-Cost Analysis: An Application to Dam Removal

Economists have long recognized that as incomes rise, values of ecosystem services will also rise relative to prices for market goods. Nevertheless, standard practices in benefit-cost analysis holds prices fixed over time, thereby creating a substantial bias against the environment. Recent contributions to theory and practice offer a practical framework for correcting this bias, including a simple rule for estimating future relative price changes for ecosystem services. However, equally important to future values of ecosystem service is the effect of population change. A rising population means that the value of both rival and non-rival ecosystem services will likely increase; and when both population and incomes are rising, the effects on ecosystem service values are compounded. The importance of correcting these biases is illustrated with the example of a long-proposed project to breach four dams on the Snake River in Washington State. A 1999 federally-mandated study without these bias corrections estimated an NPV for dam breaching of -$1.4B. When the impact of rising incomes on relative prices are accounted for, the NPV rises by $2.9B; and when both rising incomes and population are accounted for, the NPV rises by $6.5B. Strikingly, when the analysis is updated to 2023 and bias-corrected, the NPV is nearly $50B.