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Cost Benefit Analysis and the Environment Recent
Developments 1st Edition Oecd Digital Instant Download
Author(s): OECD
ISBN(s): 9789264010048, 9264010041
Edition: 1
File Details: PDF, 3.14 MB
Year: 2006
Language: english

COST-BENEFIT
ANALYSIS
AND
THE
ENVIRONMENT
Recent
Developments
Environmental protection is now an integral part of public policies, at local,
national and global levels. In all instances, the cost and benefits of policies and
projects must be carefully weighed using a common monetary measuring rod.
Yet, many different categories of benefits and cost must be evaluated, such as
health impacts, property damage, ecosystem losses and other welfare effects.
Furthermore, many of these benefits or damages occur over the long term,
sometimes over several generations, or are irreversible (e.g. global warming,
biodiversity losses).
How can we evaluate these elements and give them a monetary value? How
should we take into account impacts on future generations and of irreversible
losses? How to deal with equity and sustainability issues? This book presents
an in-depth assessment of the most recent conceptual and methodological
developments in this area. It should provide a valuable reference and tool for
environmental economists and policy analysts.
Cost-Benefit Analysis and the Environment
RECENT DEVELOPMENTS
www.oecd.org
ISBN 92-64-01004-1
97 2006 01 1 P
-:HSTCQE=UVUUY]:
The full text of this book is available on line via this link:
http://www.sourceoecd.org/environment/9264010041
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Cost-Benefit
Analysis and
the Environment
RECENT DEVELOPMENTS
ENVIRONMENT SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH ENVIRONMENT SUSTA
HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPME
SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH ENVIRONMENT SUSTAINABLE DEVEL
ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIR
ECONOMICS HEALTH ENVIRONMENT SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH
SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HE
HEALTH ENVIRONMENT SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH ENVIRONMEN
ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINAB
ENVIRONMENT SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH ENVIRONMENT SUST
ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT
HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIR
ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIR
ECONOMICS HEALTH ENVIRONMENT SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH
SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HE
HEALTH ENVIRONMENT SUSTAINABLE DEVELOPMENT ECONOMICS HEALTH ENVIRONME
ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINAB
LE DEVELOPMENT ECONOMICS HEALTH ENVIRONMENT SUSTAINABLE DEVEL
PMENT ENVIRONMENT HEALTH ECONOMICS SUSTAINABLE DEVELOPMENT ENVIR
ONMENT SUSTAINABLE DEVELOPMENT ECO
ONMENT HEALTH ECONOMICS SUS
STAINABL
OECDPUBLISHING
OECDPUBLISHING
David Pearce
Giles Atkinson
Susana Mourato

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Cost-Benefit Analysis
and the Environment
RECENT DEVELOPMENTS

ORGANISATION FOR ECONOMIC CO-OPERATION
AND DEVELOPMENT
The OECD is a unique forum where the governments of 30 democracies work together to
address the economic, social and environmental challenges of globalisation. The OECD is also at
the forefront of efforts to understand and to help governments respond to new developments and
concerns, such as corporate governance, the information economy and the challenges of an
ageing population. The Organisation provides a setting where governments can compare policy
experiences, seek answers to common problems, identify good practice and work to co-ordinate
domestic and international policies.
The OECD member countries are: Australia, Austria, Belgium, Canada, the Czech Republic,
Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Ireland, Italy, Japan, Korea,
Luxembourg, Mexico, the Netherlands, New Zealand, Norway, Poland, Portugal, the Slovak Republic,
Spain, Sweden, Switzerland, Turkey, the United Kingdom and the United States. The Commission of
the European Communities takes part in the work of the OECD.
OECD Publishing disseminates widely the results of the Organisation’s statistics gathering and
research on economic, social and environmental issues, as well as the conventions, guidelines and
standards agreed by its members.
Publié en français sous le titre :
Analyse coûts-avantages et environnement
DÉVELOPPEMENTS RÉCENTS
© OECD 2006
No reproduction, copy, transmission or translation of this publication may be made without written permission. Applications should be sent to
OECD Publishing: rights@oecd.org or by fax (33 1) 45 24 13 91. Permission to photocopy a portion of this work should be addressed to the Centre
français d'exploitation du droit de copie, 20, rue des Grands-Augustins, 75006 Paris, France (contact@cfcopies.com).
This work is published on the responsibility of the Secretary-General of the OECD. The
opinions expressed and arguments employed herein do not necessarily reflect the official
views of the Organisation or of the governments of its member countries.

FOREWORD
COST-BENEFIT ANALYSIS AND THE ENVIRONMENT: RECENT DEVELOPMENTS – ISBN 92-64-01004-1 – © OECD 2006 3
Foreword
In the early 1970s, when the OECD Environment Directorate was established, the question of how
to evaluate in monetary terms the environmental damages – or the benefits of damage reductions –
was identified as a key issue. Several publications were produced, designed to help analysts and
policy makers. These included technical handbooks and manuals designed to “communicate” the
main tenets of environmental cost-benefit analysis to policy analysts and decision makers. They also
included analysis of the “political economy” of cost-benefit analysis (e.g. political and social
obstacles to its use), and applications in specific areas, such as biodiversity valuation.
Cost-benefit analysis is now recognised as an indispensable tool for policy design and decision
making. As environmental policies are becoming more complex and challenging (e.g. global
warming, biodiversity loss, and health impacts of local air and water pollution), a number of
countries and the European Commission have introduced legal provisions requiring impact and cost-
benefit assessments of major policies and regulations. Over the last 5-10 years, considerable
progress has been made in the conceptual framework and techniques of environmental cost-benefit
analysis. This report takes stock of these recent developments, and as such provides a timely and
indispensable contribution to those in charge of policy and regulatory cost-benefit assessments.
Handbooks need to be technically rigorous, but their purpose and main content also need to be
understandable to policy-makers. It is my hope that this report strikes that balance.
This report was drafted by David W. Pearce, Susana Mourato and Giles Atkinson, under the
supervision of the OECD Working Party on National Policies. Financial support was provided by the
United Kingdom Department of the Environment, Food and Rural Affairs and the Norwegian
Ministry of Environment. The Italian Ministry of Environment and Territory hosted a workshop in
Rome in October 2004 for a detailed discussion of a first draft. The work was co-ordinated by
Jean-Philippe Barde, Head of the National Policies Division of the OECD Environment Directorate.
Lorents G. Lorentsen
Director
OECD Environment Directorate

FOREWORD
COST-BENEFIT ANALYSIS AND THE ENVIRONMENT: RECENT DEVELOPMENTS – ISBN 92-64-01004-1 – © OECD 2006
4
Authors’ Acknowledgements. This volume arose as the product of a discussion
between one of the authors (David W. Pearce) and the OECD Secretariat. OECD has a
distinguished history of pioneering economic analysis of environmental issues,
including cost-benefit analysis and the monetary valuation of environmental
impacts. But there was no publication that brought together some of the recent
developments in cost-benefit analysis, and, given its record, OECD seems the right
place to locate such a study. We hope the volume will be useful both to academics
and, more importantly, practitioners, since cost-benefit analysis is now widely
practised and used. To this end, each chapter concludes with a “decision-maker’s
guide” to the central points raised in the chapters. For busy people with little time to
devote to sustained study of the literature, some of the theoretical developments are
not easy to understand. We have done our best to explain what we understand the
contributions to be, but we recognise that many readers will not have the time to work
through each chapter. The decision-maker’s guide at the end of each chapter is
therefore designed to offer some intuition as to the nature of the insights so that, at
the very least, someone receiving or commissioning work in cost-benefit analysis has
some idea of what they should expect from up-to-date analysis. Unfortunately, the
very nature of the theory is such that it will not be instantly understood by everyone,
not even by economists. Hence we urge those who do have time to work their way
through the chapters that are of interest to them.
The work would never have been completed without the advice and
understanding of Jean-Philippe Barde of the OECD Environment Directorate. We wish
to thank him for all his patience and helpful comments. Parts of the document were
discussed at an OECD Working Party in Paris on National Environmental Policy in
May 2004: we are indebted to the delegates there for very useful comments which
helped us redirect the work effort. Most of the contents were further discussed at a
special Workshop on Recent Developments in Environmental Cost-benefit Analysis
hosted by the Italian Ministry of Environment and Territory in Rome in October 2004.
We are indebted to the various experts there for helpful suggestions on corrections
and on new material that now appears in this final version of the volume.
Section 14.10 has been prepared by Pascale Scapecchi of the OECD Environment
Directorate – we truly appreciate her contribution.
Finally, we are indebted to our colleagues at University College London who have
helped shape our understanding of the issues in question. Above all, we thank
Joe Swierzbinski who has commented on selected chapters and whose graduate
teaching notes reach standards of expositional elegance that are unequalled in the
literature. We have all learned a great deal from him.

David W. Pearce
In Memoriam
This project and this book were initiated in 2003, under the initiative of David Pearce
who took a leading role in carrying it through to its completion. Prior to publication,
David suddenly passed away on the 8th September 2005. David contributed to the work of
the OECD for 34 years, in the course of which he made significant contributions to
environmental economics and sustainable development. David Pearce’s “opus” and
influence are immense, and his capacity to link sound conceptual analysis with the
political economy of environmental policy has helped to shape environmental policies in
OECD countries. He was a mentor and a friend, and will be sorely missed. It has been our
great privilege to work with him.
Jean-Philippe Barde

TABLE OF CONTENTS
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Chapter 1. Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
1.1. Purpose of this volume . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
1.2. A very brief history of cost-benefit analysis. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
1.3. Why use CBA? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
1.4. Guidance on environmental CBA in OECD countries: some examples . . . . . . . . . 36
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Chapter 2. The Foundations of Cost-benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
2.1. Utility, well-being and aggregation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.2. The decision rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
2.3. Aggregation rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
2.4. Inflation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
2.5. Benefits, costs, WTP and WTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
2.6. WTP “versus” WTA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.7. Critiques of CBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
2.8. Summary and guidance for decision-makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
2.9. Further reading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
Chapter 3. The Stages of a Practical Cost-benefit Analysis. . . . . . . . . . . . . . . . . . . . . . . 51
3.1. The questions to be addressed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
3.2. The issue of standing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.3. Assessing the impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
3.4. Impacts and time horizons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
3.5. Finding money values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.6. Selecting a discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
3.7. Accounting for rising relative valuations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.8. Dealing with risk and uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59
3.9. Who gains, who loses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
Annex 3.A1. Some Formal Statements About CBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
Chapter 4. Decision Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
4.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.2. The choice context . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
4.3. Alternative decision rule criteria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70

TABLE OF CONTENTS
8
Chapter 5. Policy and Project Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
5.1. Dealing with costs and benefits: some terminology . . . . . . . . . . . . . . . . . . . . . . . . . 76
5.2. Optimism and pessimism in cost estimation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
5.3. General equilibrium analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
5.4. Competitiveness impacts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
5.5. Complementary benefits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
5.6. Employment creation as a benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80
5.7. Summary and guidance for policy-makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
Chapter 6. Total Economic Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
6.1. The nature of total economic value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6.2. TEV and valuation techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
6.3. A note on intrinsic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
Chapter 7. Revealed Preference Methods for Valuing Non-market Impacts . . . . . . . . 91
7.1. An introduction to revealed preference methods . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
7.2. The hedonic price method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 93
7.3. The travel cost method . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96
7.4. Averting behaviour and defensive expenditure. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 98
7.5. Cost of illness and lost output approaches. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100
Chapter 8. Stated Preference Approaches I: Contingent Valuation Method . . . . . . . . 105
8.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
8.2. Designing a contingent valuation questionnaire. . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
8.3. Mean versus median willingness to pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
8.4. Validity and reliability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119
8.5. Conclusions and guidance for policy makers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
Chapter 9. Stated Preference Approaches II: Choice Modelling . . . . . . . . . . . . . . . . . . . 125
9.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
9.2. Choice modelling techniques . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 126
9.3. Advantages and problems of choice modelling . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139
Annex 9.A1. Conceptual Foundations of Choice Modelling . . . . . . . . . . . . . . . . . . . . . . . 140
Chapter 10. (Quasi) Option Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145
10.1. Some terminology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146
10.2. A model of QOV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147
10.3. How large is QOV? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 153
Annex 10.A1. Deriving the Expected Value of Waiting . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154

TABLE OF CONTENTS
Chapter 11. Willingness to Pay vs. Willingness to Accept . . . . . . . . . . . . . . . . . . . . . . . . 155
11.1. Conventional procedures for economic valuation . . . . . . . . . . . . . . . . . . . . . . . . . . 156
11.2. Consumer’s surplus for quantity changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156
11.3. Property rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
11.4. Do WTP and WTA differ in practice?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
11.5. Why do WTP and WTA diverge? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
11.6. Why do the competing explanations for WTA > WTP matter? . . . . . . . . . . . . . . . . 164
11.7. Practical reasons for using WTP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 164
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 165
Annex 11.A1. Hicks’s Measures of Consumer Surplus for a Price Change. . . . . . . . . . . . 166
Chapter 12. The Value of Ecosystem Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169
12.1. Ecosystem services. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
12.2. Marginal vs. total valuation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 171
12.3. Finding ecosystem values . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 174
12.4. Valuing an ecosystem product: genetic information for pharmaceuticals . . . . . . 175
12.5. Actual and potential economic value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 179
12.6. Cost-benefit analysis and precaution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 180
Chapter 13. Discounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 183
13.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 184
13.2. Zero discounting. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
13.3. Time declining rates: a practical rationale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
13.4. Time declining rates: a theoretical rationale based on uncertainty about
interest rates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 186
13.5. Time declining rates: a theoretical rationale based on uncertainty about
the economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
13.6. Social choice and declining discount rates. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
13.7. The problem of time-inconsistency. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 189
13.8. Conclusions and guidance for decision-makers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 190
Chapter 14. Valuing Health and Life Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 193
14.1. Introduction: the importance of health effects in CBA. . . . . . . . . . . . . . . . . . . . . . . 194
14.2. Valuing life risks: the VOSL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
14.3. The sensitivity of VOSL to risk levels . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 196
14.4. VOSL and the income elasticity of willingness to pay . . . . . . . . . . . . . . . . . . . . . . . 198
14.5. The size of VOSL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199
14.6. Age and VOSL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 201
14.7. Latent risks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203
14.8. VOSL and VOLY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
14.9. Implied “values of life”. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
14.10. Valuing children’s lives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 207
14.11. Valuing morbidity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212

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14.12. Cancer premia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 217
Annex 14.A1. Deriving the Value of a Statistical Life . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 218
Chapter 15. Equity and Cost-benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 221
15.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 222
15.2. Equity and efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223
15.3. Analysing the distributional impacts of projects within a cost-benefit
framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225
15.4. Competing principles of equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 235
Annex 15.A1. Deriving a Marginal Utility of Income Weighting Procedure . . . . . . . . . . . 236
Chapter 16. Sustainability and Cost-benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . 237
16.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238
16.2. Sustainability: background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
16.3. Weak sustainability and CBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240
16.4. Strong sustainability and CBA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 245
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 252
Chapter 17. Benefits Transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 253
17.1. Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254
17.2. Benefits transfer: basic concepts and methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 255
17.3. Benefits transfer guidelines and databases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
17.4. The validity of benefits transfer. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
Chapter 18. Cost-benefit Analysis and Other Decision-making Procedures . . . . . . . . . 269
18.1. A gallery of procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
18.2. Environmental Impact Assessment (EIA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
18.3. Strategic Environmental Assessment (SEA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
18.4. Life Cycle Analysis (LCA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 271
18.5. Risk Assessment (RA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
18.6. Comparative Risk Assessment (CRA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 272
18.7. Risk-Benefit Analysis (RBA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
18.8. Risk-Risk Analysis (RRA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
18.9. Health-Health Analysis (HHA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273
18.10. Cost-Effectiveness Analysis (CEA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274
18.11. Multi-Criteria Analysis (MCA). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275
Annex 18.A1. Multi-criteria Analysis and the “Do Nothing” Option. . . . . . . . . . . . . . . . . 277

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Chapter 19. The Political Economy of Cost-benefit Analysis . . . . . . . . . . . . . . . . . . . . . . 279
19.1. The issue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
19.2. Political welfare functions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 280
19.3. Efficiency as a social goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 281
19.4. Welfare and self-interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 282
19.5. Money as the numeraire . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
19.6. Interest groups again . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 283
19.7. Flexibility in politics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
19.8. Is CBA participatory? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284
19.9. Uncertainty . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285
19.10. Economic literacy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286
Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 287
References. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 289
Indexes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 307
List of boxes
3.1. Achieving air quality targets in Europe. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
3.2. The overall cost-benefit equation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
5.1. Ancillary benefits from climate change control policies. . . . . . . . . . . . . . . . . . . . . 81
7.1. HPM and the impact of water quality on residential property values . . . . . . . . . . 95
7.2. The recreational value of game reserves in South Africa. . . . . . . . . . . . . . . . . . . . . 97
7.3. Averting behaviour and air quality in Los Angeles . . . . . . . . . . . . . . . . . . . . . . . . . . 100
8.1. Eliciting negative WTP. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.2. Coercion vs. voluntarism and WTP for a public good . . . . . . . . . . . . . . . . . . . . . . . . 113
8.3. Value uncertainty and WTP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117
8.4. Risk insensitivity in stated preference studies. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
8.5. Hypothetically speaking: Cheap talk and contingent valuation . . . . . . . . . . . . . . . 123
9.1. Choice experiments and a cleaner river Thames . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
9.2. Testing the cognitive burden of choice modelling . . . . . . . . . . . . . . . . . . . . . . . . . . 135
10.1. Quasi option value and tropical forest conversion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152
15.1. Distributional CBA and climate change . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 230
15.2. Balancing competing principles of environmental equity . . . . . . . . . . . . . . . . . . . . 232
16.1. Changes in wealth per capita . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 242
16.2. Sustainability and cost benefit analysis of tropical deforestation . . . . . . . . . . . . . 244
16.3. Climate change and shadow projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 249
16.4. The public trust doctrine and shadow projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 250
17.1. Benefits transfer and the policy process: The case of the River Kennet . . . . . . . . 261
17.2. Valuing health in the European Union – Are values consistent across countries?. . . 263
17.3. Temporal reliability of transfer estimates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264
List of tables
2.1. Compensating and equivalent variation measures. . . . . . . . . . . . . . . . . . . . . . . . . . 46
4.1. Ranking independent projects . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
4.2. Choosing projects using the IRR Rule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72
7.1. An overview of revealed preference methods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92

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7.2. Per trip values for game reserves of KwaZulu-Natal, 1994/5 . . . . . . . . . . . . . . . . . . 98
8.1. Possible valuation topics and potential problems. . . . . . . . . . . . . . . . . . . . . . . . . . . 109
8.2. Translating intended actions into WTP estimates . . . . . . . . . . . . . . . . . . . . . . . . . . 112
8.3. Examples of common elicitation formats. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 115
8.4. Elicitation formats – some stylised facts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 116
8.5. A scope test for mortality risks (Median WTP, USD) . . . . . . . . . . . . . . . . . . . . . . . . . 121
9.1. Stages of a choice modelling exercise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
9.2. Main choice modelling alternatives. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127
9.3. River attributes and levels. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
9.4. Comparison of test failures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 136
11.1. Summary of surplus measures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 158
11.2. Summary links between WTP, WTA and equivalent and compensating
measures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 159
11.3. WTA/WTP for types of goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
11.4. Ratio of WTA to WTP for public goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160
11.5. Summary of factors affecting the WTA-WTP disparity . . . . . . . . . . . . . . . . . . . . . . 161
12.1. Economic characteristics of ecosystem products and services . . . . . . . . . . . . . . . 174
12.2. Estimates of the pharmaceutical value of “hot spot” land areas . . . . . . . . . . . . . . 177
13.1. Numerical example of Weitzman’s declining certainty-equivalent
discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 187
14.1. Recent estimates of the VOSL. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
14.2. Recent studies of the age-WTP relationship. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 202
14.3. Valuing future risks and immediate risks (GBP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 204
14.4. Direct estimates of the VOLY (GBP) – Chilton et al. (2004) for the UK . . . . . . . . . . . 205
14.5. Indirect estimates of the VOLY (GBP) – Markandya et al. (2004) . . . . . . . . . . . . . . . 206
14.6. Comparison of VOLYs and VOSLs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 206
14.7. Studies valuing children’s health. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210
14.8. Values for morbidity in Europe: GBP WTP to avoid an episode . . . . . . . . . . . . . . . . 212
14.9. Comparison of morbidity values in Ready et al. (2004a) and those in ExternE
and Maddison (2000) (GBP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214
14.10. Economic valuation of NFCs (GBP 1999) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 215
15.1. Distributional weights and CBA – illustrative example . . . . . . . . . . . . . . . . . . . . . . 229
15.2. Relative social value of gains and losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 229
15.3. Estiamtes of distributional weighted climate change damages . . . . . . . . . . . . . . . 231
16.1. Change in wealth per capita, selected countries, 1999 . . . . . . . . . . . . . . . . . . . . . . . 242
16.2. Value of excess derorestration, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 244
17.1. An illustration of the RPA methodology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 259
17.2. Performance of transfer methods – an example . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265
18.A1.1. Weighted input data for an MCA: cost weighted at unity. . . . . . . . . . . . . . . . . . . 277
List of figures
6.1. Total economic value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
6.2. Total economic value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88
8.1. Payment card in CV study of improvements in Scottish coastal waters . . . . . . . 117
9.1. Illustrative choice experiment question. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
9.2. Illustrative contingent ranking question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131
9.3. Illustrative contingent rating question . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132
9.4. Illustrative paired comparisons question. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132

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9.5. Sample contingent ranking question from pesticide survey. . . . . . . . . . . . . . . . . 135
10.1. A decision tree . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149
11.1. Demand curve representations of consumer’s surplus . . . . . . . . . . . . . . . . . . . . . 157
A11.1. Hicks’s four consumer’s surpluses for a price fall. . . . . . . . . . . . . . . . . . . . . . . . . . 167
12.1. Stylised costs and benefits of ecosystem service provision. . . . . . . . . . . . . . . . . . 172
14.1. Risk and willingness to pay . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
15.1. Sample ranking card for Experiment 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 232
16.1. Project selection and strong sustainability. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 248
17.1. Continuum of decision settings and the required accuracy of a benefits
transfer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

ISBN 92-64-01004-1
Cost-Benefit Analysis and the Environment
Recent Developments
© OECD 2006
Executive Summary

EXECUTIVE SUMMARY
16
Introduction
The OECD has long championed efficient decision-making using economic analysis. It was,
for example, one of the main sponsors of the early manuals in the late 1960s on project
evaluation authored by Ian Little and James Mirrlees.* Since then, cost-benefit analysis has
been widely practised, notably in the fields of environmental policy, transport planning,
and healthcare. In the last decade or so, cost-benefit analysis has been substantially
developed both in terms of the underlying theory and in terms of sophisticated
applications. Many of those developments have been generated by the special challenges
that environmental problems and environmental policy pose for cost-benefit analysis. The
OECD has therefore returned to the subject in this new and comprehensive volume that
brings analysts and decision-makers up to date on the main developments.
History and uses of CBA
The history of cost-benefit analysis (CBA) shows how its theoretical origins date back to
issues in infrastructure appraisal in France in the 19th century. The theory of welfare
economics developed along with the “marginalist” revolution in microeconomic theory in
the later 19th century, culminating in Pigou’s Economics of Welfare in 1920 which further
formalised the notion of the divergence of private and social cost, and the “new welfare
economics” of the 1930s which reconstructed welfare economics on the basis of ordinal
utility only. Theory and practice remained divergent, however, until the formal
requirement that costs and benefits be compared entered into water-related investments
in the USA in the late 1930s. After World War II, there was pressure for “efficiency in
government” and the search was on for ways to ensure that public funds were efficiently
utilised in major public investments. This resulted in the beginnings of the fusion of the
new welfare economics, which was essentially cost-benefit analysis, and practical
decision-making. Since the 1960s CBA has enjoyed fluctuating fortunes, but is now
recognised as the major appraisal technique for public investments and public policy.
Theoretical foundations
The essential theoretical foundations of CBA are: benefits are defined as increases in
human wellbeing (utility) and costs are defined as reductions in human wellbeing. For a
project or policy to qualify on cost-benefit grounds, its social benefits must exceed its
social costs. “Society” is simply the sum of individuals. The geographical boundary for CBA
is usually the nation but can readily be extended to wider limits. There are two basic
* Little, I and J. Mirrlees (1974), Project Appraisal and Planning for Developing Countries, Oxford, Oxford
University Press (The “OECD Manual”).

EXECUTIVE SUMMARY
aggregation rules. First, aggregating benefits across different social groups or nations
involves summing willingness to pay for benefits, or willingness to accept compensation
for losses (WTP, WTA respectively), regardless of the circumstances of the beneficiaries or
losers. A second aggregation rule requires that higher weights be given to benefits and
costs accruing to disadvantaged or low income groups. One rationale for this second rule is
that marginal utilities of income will vary, being higher for the low income group.
Aggregating over time involves discounting. Discounted future benefits and costs are
known as present values. Inflation can result in future benefits and costs appearing to be
higher than is really the case. Inflation should be netted out to secure constant price
estimates. The notions of WTP and WTA are firmly grounded in the theory of welfare
economics and correspond to notions of compensating and equivalent variations. WTP
and WTA should not, according to past theory, diverge very much. In practice they appear
to diverge, often substantially, and with WTA > WTP. Hence the choice of WTP or WTA may
be of importance when conducting CBA.
There are numerous critiques of CBA. Perhaps some of the more important ones are: a) the
extent to which CBA rests on robust theoretical foundations as portrayed by the Kaldor-Hicks
compensation test in welfare economics; b) the fact that the underlying “social welfare
function” in CBA is one of an arbitrarily large number of such functions on which consensus
is unlikely to be achieved; c) the extent to which one can make an ethical case for letting
individuals’ preferences be the (main) determining factor in guiding social decision rules;
and d) the whole history of neoclassical welfare economics has focused on the extent to
which the notion of economic efficiency underlying the Kaldor-Hicks compensation test
can or should be separated out from the issue of who gains and loses – the distributional
incidence of costs and benefits. CBA has developed procedures for dealing with the last
criticism, e.g. the use of distributional weights and the presentation of “stakeholder”
accounts. Criticisms a) and b) continue to be debated. Criticism c) reflects the “democratic
presumption” in CBA, i.e. individuals’ preference should count.
The stages of CBA
Conducting a well-executed CBA requires the analyst to follow a logical sequence of steps.
The first stage involves asking the relevant questions: what policy or project is being
evaluated? What alternatives are there? For an initial screening of the contribution that the
project or policy makes to social wellbeing to be acceptable, the present value of benefits
must exceed the present value of costs.
Determining “standing” – i.e. whose costs and benefits are to count – is a further preliminary
stage of CBA, as is the time horizon over which costs and benefits are counted. Since
individuals have preferences for when they receive benefits or suffer costs, these “time-
preferences” also have to be accounted for through the process of discounting. Similarly,
preferences for or against an impact may change through time and this “relative price”
effect also has to be accounted for. Costs and benefits are rarely known with certainty so
that risk (probabilistic outcomes) and uncertainty (when no probabilities are known) also
have to be taken into account. Finally, identifying the distributional incidence of costs and
benefits is also important.

EXECUTIVE SUMMARY
18
Decision rules
Various decision rules may be used for comparing costs and benefits. The correct criterion
for reducing benefits and costs to a unique value is the net present value (NPV) or “net
benefits” criterion. The correct rule is to adopt any project with a positive NPV and to rank
projects by their NPVs. When budget constraints exist, however, the criteria become more
complex. Single-period constraints – such as capital shortages – can be dealt with by a
benefit-cost ratio (B/C) ranking procedure. There is general agreement that the internal rate
of return (IRR) should not be used to rank and select mutually exclusive projects. Where a
project is the only alternative proposal to the status quo, the issue is whether the IRR
provides worthwhile additional information. Views differ in this respect. Some argue that
there is little merit in calculating a statistic that is either misleading or subservient to the
NPV. Others see a role for the IRR in providing a clear signal as regards the sensitivity of a
project’s net benefits to the discount rate. Yet, whichever perspective is taken, this does not
alter the broad conclusion about the general primacy of the NPV rule.
Dealing with costs
The cost component is the other part of the basic CBA equation. As far as projects are
concerned, it is unwise to assume that because costs may take the form of equipment and
capital infrastructure their estimation is more certain than benefits. The experience is that
the costs of major projects can be seriously understated. The tendency for policies is for
their compliance costs to be overstated. In other words there may be cost pessimism or
cost optimism. In light of this it is important to conduct sensitivity analysis, i.e. to show
how the final net benefit figure changes if costs are increased or decreased by some
percentage. Ideally, compliance costs would be estimated using general equilibrium
analysis.
Politicians are very sensitive about the effects of regulation on competitiveness. This is
why most Regulatory Impact Assessment procedures call for some kind of analysis of these
effects. A distinction needs to be made between the competitiveness of nations as whole,
and the competitiveness of industries. In the former case it is hard to assign much
credibility to the notion of competitiveness impacts. In the latter case two kinds of effects
may occur. The first is any impact on the competitive nature of the industry within the
country in question – e.g. does the policy add to any tendencies for monopoly power? If it
does then, technically, there will be welfare losses associated with the change in that
monopoly power and these losses should be added to the cost side of the CBA, if they can
be estimated. The second impact is on the costs of the industry relative to the costs of
competing industries in other countries. Unless the industry is very large, it cannot be
assumed that exchange rate movements will cancel out the losses arising from the cost
increases. In that case there may be dynamic effects resulting in output losses.
Policies to address one overall goal may have associated effects in other policy areas.
Climate change and conventional air pollutants is a case in point. Reductions in climate
gases may be associated with reductions in jointly produced air pollutants. Should the two
be added and regarded as a benefit of climate change policy? On the face of it they should,
but care needs to be taken that the procedure does not result in double counting. To
address this it is important to consider the counterfactual, i.e. what policies would be in

EXECUTIVE SUMMARY
place without the policy of immediate interest. While it is common practice to add the
benefits together, some experts have cast doubt on the validity of the procedure.
Finally, employment effects are usually also of interest to politicians and policy-makers.
But the extent to which they matter for the CBA depends on the nature of the economy. If
there is significant unemployment, the labour should be shadow priced on the basis of its
opportunity cost. In turn this may be very low, i.e. if not used for the policy or project in
question, the labour might otherwise be unemployed. In a fully employed economy,
however, this opportunity cost may be such as to leave the full cost of labour being
recorded as the correct value.
Total economic value
The notion of total economic value (TEV) provides an all-encompassing measure of the
economic value of any environmental asset. It decomposes into use and non-use (or passive
use) values, and further sub-classifications can be provided if needed. TEV does not
encompass other kinds of values, such as intrinsic values which are usually defined as
values residing “in” the asset and unrelated to human preferences or even human observation.
However, apart from the problems of making the notion of intrinsic value operational, it
can be argued that some people’s willingness to pay for the conservation of an asset,
independently of any use they make of it, is influenced by their own judgements about
intrinsic value. This may show up especially in notions of “rights to existence” but also as
a form of altruism. Any project or policy that destroys or depreciates an environmental
asset needs to include in its costs the TEV of the lost asset. Similarly, in any project or
policy that enhances an environmental asset, the change in the TEV of the asset needs to
be counted as a benefit. For instance, ecosystems produce many services and hence the
TEV of any ecosystem tends to be equal to the discounted value of those services.
Revealed preference valuation
Economists have developed a range of approaches to estimate the economic value of non-
market or intangible impacts. There are several procedures that share the common feature
of using market information and behaviour to infer the economic value of an associated
non-market impact.
These approaches have different conceptual bases. Methods based on hedonic pricing
utilise the fact that some market goods are in fact bundles of characteristics, some of
which are intangible goods (or bads). By trading these market goods, consumers are
thereby able to express their values for the intangible goods, and these values can be
uncovered through the use of statistical techniques. This process can be hindered,
however, by the fact that a market good can have several intangible characteristics, and
that these can be collinear. It can also be difficult to measure the intangible characteristics
in a meaningful way.
Travel cost methods utilise the fact that market and intangible goods can be complements,
to the extent that purchase of market goods and services is required to access an intangible
good. Specifically, people have to spend time and money travelling to recreational sites,
and these costs reveal something of the value of the recreational experience to those
people incurring them. The situation is complicated, however, by the fact that travel itself

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nationale, dans laquelle il développa les avantages de la culture des
rutabagas et de l'éducation des vers à soie!
La prédication achevée, la foule, composée d'une trentaine de
personnes, se retira, et Maurice allait en faire autant, lorsqu'un
ouvrier, qui avait écouté le sermon avec une impatience visible,
s'approcha tout à coup du prédicateur qui venait de quitter la chaire,
et, lui barrant le passage:
«Minute, monsieur l'abbé, dit-il en portant la main à sa tête nue,
comme s'il eût voulu saluer avec ses cheveux, vous venez de
converser sur les chenilles et les navets; mais c'est pas là mon
affaire, je voudrais savoir si j'ai celui de parler au fondateur de
l'Église nationale?
—A lui-même, mon ami, dit le ministre.
—Alors, reprit l'ouvrier, qui s'était évidemment rafraîchi assez de
fois pour se trouver légèrement échauffé, vous êtes l'abbé Coulant,
le véritable abbé Coulant?
—Précisément.»
L'ouvrier lui donna dans la poitrine un coup de poing d'amitié.
«Eh bien! vous êtes mon homme, s'écria-t-il, c'est vous que je
cherche! Depuis ce matin je suis entré chez tous les marchands de
vin du quartier pour savoir l'adresse de l'Église nationale: ni vu ni
connu! Il paraît que votre religion est ici en chambre garnie?»
L'abbé Coulant voulut s'excuser.
«Y a pas de mal, reprit l'ouvrier; moi aussi, je le suis, en chambre
garnie, et pas si bien logé que votre bon Dieu encore! Mais à la
guerre comme à la guerre.
—Vous aviez quelque question à m'adresser? demanda le prêtre.
—J'en ai vingt, des questions, répliqua l'ouvrier, vu qu'on m'a dit
que vous étiez un bon enfant; et moi, j'aime les bons enfants.
—Enfin.
—En douceur, donc! Pour en venir à la fin, il faut prendre au
commencement. Pour lors, mon abbé, vous saurez que je m'appelle

Narcisse Soiffard, un nom qui en vaut un autre, et que j'ai une fille
de douze ans qui aide sa mère à carder les matelas. Y a pas de
péché à ça, qu'il me semble.
—Au contraire, le travail est un devoir.
—C'est ce que je répète toujours à ma fille et à sa mère. Le
travail, que je leur dis, est un devoir pour la femme… Mais, voyez-
vous, la maman a des croyances; elle veut que sa fille fasse sa
première communion; moi, je ne vais pas à l'encontre, parce que la
croyance, c'est, sans comparaison, comme le vin: faut respecter
ceux qui en ont trop pris et les laisser marcher de travers. Si bien
donc que je suis allé trouver le curé de notre paroisse, et que je lui
ai dit la chose.
—Et il vous a répondu?…
—Ah! voilà le curieux!… Il m'a répondu que pour communier il
fallait savoir ce que l'on faisait.
—C'est-à-dire assister au catéchisme?
—Juste! assister au catéchisme, à l'heure où elle travaille avec sa
mère! «Mais, mon curé, que je lui ai dit, vous voulez donc nous faire
mourir de soif? Si la petite est obligée d'aller chez vous, l'ouvrage
restera forcément en arrière.
—Il faut qu'elle apprenne sa religion, qu'il me répond.
—Je veux bien, pourvu que ce soit en cardant des matelas», que
je lui redis… Il me semble que c'était clair comme bonjour! Eh bien!
il n'a pas compris!»
L'abbé Coulant haussa les épaules.
«Cela devait être, dit-il; le clergé n'entend rien aux besoins du
peuple. Amenez-moi votre fille, et je la ferai communier.
—Sans l'instruire?
—A quoi bon? Ce n'est point la science qui est agréable à Dieu.
L'Église nationale ne demande que la bonne volonté.»
Soiffard frappa ses mains l'une contre l'autre.

«Voilà la religion de mon choix! s'écria-t-il. Rien que de la bonne
volonté! ça ne ruine pas… Vous pouvez m'inscrire dans votre
paroisse, monsieur Coulant; je veux que ça soit vous qui enterriez
ma femme quand elle mourra.
—Vous aurez soin seulement, reprit le ministre, de donner à votre
fille son extrait de baptême.»
L'ouvrier regarda l'abbé et tordit sa casquette, qu'il tenait à deux
mains.
«Ah! oui, son extrait de baptême, répéta-t-il plus lentement; il
vous faut ça pour la communion.
—Sans doute.
—C'est que je vas vous dire… Sa mère et moi nous avons
toujours été si occupés… que la petite n'a pas été précisément
baptisée.
—Vous pouvez réparer cet oubli.
—Je ne dis pas, mais ça coûte six francs, le prix de huit bouteilles
de vin à quinze. D'ailleurs elle est nommée: on l'appelle Rose.
—Au fait, elle a une patronne dans le calendrier. Eh bien, voyons,
nous arrangerons cela; l'Église nationale est accommodante.
—Eh bien, la voilà la religion de mon choix; votre main, monsieur
Coulant, sans vous commander.
—C'est entendu, reprit le curé en souriant; il suffira que votre
femme apporte un extrait de votre acte de mariage.»
Soiffard gratta le parquet avec le bout de son pied, et cracha
devant lui.
«Ah! il faut l'acte de mariage, dit-il avec quelque embarras; c'est
donc nécessaire?
—Indispensable.»
L'ouvrier se frotta la tête.
«Alors… ça sera difficile, reprit-il en balbutiant, ça sera bien
difficile, monsieur Coulant; vu que nous avons beaucoup voyagé, et
que, dans les voyages, les papiers, ça s'égare… d'autant que ma

femme et moi, quand nous nous sommes mariés, nous avons
négligé d'aller à la mairie.
—Ah diable!
—Toujours par raison d'économie. Vous devez comprendre ça: un
acte de mariage coûte encore plus qu'un baptême, et dans notre
état on regarde à toutes les dépenses; faut savoir se priver.
—C'est juste, dit l'abbé en soupirant; après tout, Dieu a bien
pardonné à la femme adultère! Allons, nous fermerons les yeux,
maître Soiffard; l'Église nationale respecte la vie privée.
—Vrai? s'écria Soiffard. La voilà la religion de mon choix! Mille
millions, monsieur Coulant, vous êtes un brave homme, et je veux
vous payer un verre de vin.»
L'abbé eut beaucoup de peine à se défendre de la politesse de
son nouveau paroissien, et put regagner la sacristie.
Soiffard le regarda partir, puis, étendant la main vers l'autel, avec
la gravité solennelle des ivrognes:
«C'est dit, murmura-t-il, la religion me vexait quand elle me
défendait de boire, de battre la bourgeoise et de vivre à ma
fantaisie; mais, puisque celui-ci a trouvé un Dieu qui est bon prince,
je l'adopte, et, à partir d'aujourd'hui, je déclare que moi Narcisse
Soiffard, ainsi que la dame Soiffard et la petite, nous faisons partie
de l'Église ici présente à perpétuité.»
A ces mots, il remit son bonnet et sortit en chancelant.
Maurice rentra pensif et découragé; Marthe, qui l'attendait avec
impatience, fut frappée de sa tristesse.
«Qu'as-tu donc vu? demanda-t-elle avec anxiété.
—Ce que j'aurais dû prévoir, dit Maurice en serrant les mains de
la jeune femme; nous avions déjà vainement cherché dans ce
monde perfectionné l'amour et la poésie; mais restait la foi, qui
console de tout…
—Eh bien?
—Hélas! elle aussi s'est envolée.»

CONCLUSION.
Marthe et Maurice demeurèrent le cœur navré. Tous deux
pleuraient sur ce monde où l'homme était devenu l'esclave de la
machine, l'intérêt le remplaçant de l'amour; où la civilisation avait
appuyé le triomphe mystique du chrétien sur les trois passions qui
conduisent l'homme aux abîmes; et tous deux s'endormirent dans
ces tristes pensées.
Mais, durant leur sommeil, ils eurent une vision.
Il leur sembla que Dieu abaissait les yeux vers la terre, et qu'à la
vue du monde tel que l'avait fait la corruption humaine, il disait:
«Voilà que ceux-ci ont oublié les lois que j'avais gravées dans leur
cœur; leur vue intérieure s'est troublée, et chacun d'eux n'aperçoit
plus rien au delà de lui-même. Parce qu'ils ont enchaîné les eaux,
emprisonné l'air et maîtrisé le feu, ils se sont dit:—Nous sommes les
maîtres du monde, et nul n'a de compte à nous demander de nos
pensées. Mais je les détromperai durement: car je briserai les
chaînes des eaux, j'ouvrirai la prison de l'air, je rendrai au feu sa
violence, et alors ces rois d'un jour reconnaîtront leur faiblesse.»
A ces mots il avait fait signe; les trois anges de la colère s'étaient
précipités vers la terre, où tout était devenu ruine et confusion.
Pendant un long rêve, Marthe et Maurice avaient vu les portiques
croulant, les fleuves débordés, les incendies roulant en vagues de
flammes, et, dans cette destruction générale, le genre humain qui
fuyait éperdu!
Mais au plus fort du désastre, une voix avait crié:
«Paix aux hommes de bonne volonté. C'est pour eux que
l'humanité renaîtra et que le monde sortira de ses ruines.»

TABLE DES MATIÈRES
Pages.
I. Prologue 1
II.—Éloquence parlementaire de Maurice.—Éloquence
perfectionnée de M. Omnivore.—Costume d'un homme
établi, en l'an trois mille.—M. Atout.—Départ de Marthe et
de Maurice.—Nouveau moyen de traverser les rivières.—
Routes souterraines.—M. Atout rassure Marthe par un calcul
statistique.—Marthe s'endort.—Un rêve 17
III.—Extraction de voyageurs.—Auberges modèles.—Le verre
d'eau de fontaine.—Départ de Marthe et de Maurice sur la
Dorade accélérée, bateau sous-marin.—M. Blaguefort,
commis-voyageur pour les nez, la librairie et les denrées
coloniales.—Un prospectus d'entreprise industrielle de l'an
trois mille.—Fâcheuse rencontre d'une baleine.—Leçon de M.
Vertèbre sur les cétacés.—Destruction du bateau sous-
marin.—Son extrait mortuaire 30
IV.—Octroi d'un peuple ultra-super-civilisé.—Inconvénient des
passe-ports daguerréotypés.—Maison modèle de M. Atout.—
Moyen d'être servi sans domestiques.—Le souper à la
mécanique.—Une vieille tradition: La Fileuse D'Évrecy 47
V.—Monologue de Maurice en se déshabillant.—Inconvénients
des chambres à coucher perfectionnées.—Une excursion
involontaire.—Le salon de M. Atout; multiplication exagérée
de l'image d'un grand homme.—M. Atout présente à ses
hôtes sa légitime épouse, milady Ennui 59
PREMIÈRE JOURNÉE.
VI.—Un salon.—Présentation de madame Atout complétée.—
Promenade aérienne; le bois de Boulogne de Sans-Pair, dont
65

les arbres sont des tuyaux de cheminée.—Une femme à la
mode.—Maternité
VII.—Maison d'allaitement.—Substitution de la vapeur à la
maternité.—Lait de femme perfectionné.—Moyen de
reconnaître les vocations.—Grand collége de Sans-Pair.—
Programme pour le baccalauréat ès lettres.—Nouvelles
méthodes d'enseignement.—Machine à examen.—
Catéchisme des jeunes filles.—Pensionnat pour la production
des phénomènes 73
VIII.—Agrandissement des magasins de nouveautés.—Histoire
de mademoiselle Romain.—Aspect pittoresque de la ville de
Sans-Pair.—Maladie de milady Ennui, traitée par quatorze
médecins spécialistes, et guérie par Maurice.—Société
d'assurance pour empêcher les vivants de regretter les
morts.—Rencontre du grand philanthrope M. Philadelphe Le
Doux 90
IX.—Promenades de Sans-Pair embellies de légumes monstres.
—Maison de placement matrimonial patentée du
Gouvernement (sans garantie).—Une pastorale
arithmétique.—Un heureux monstre.—Mémoires
philosophiques du roi Extra 103
X.—Un empoisonneur de bonne société.—Palais de justice de
Sans-Pair.—Carte routière de la probité légale.—Procédés de
fabrication pour l'éloquence des avocats.—Tarif des sept
péchés capitaux.—Le vieux mendiant et son chien 116
XI.—Logis des Trappistes.—Moralisation des condamnés par
l'idiotisme; première diatribe de Maurice.—Les
Pantagruélistes; avantages de la profession de criminel;
seconde diatribe de Maurice.—M. Le Doux ne répond rien et
garde ses opinions 127
XII.—Usine de M. Isaac Banqman; supériorité des machines sur
les hommes.—Souvenirs de Maurice; le soldat Mathias.—
Pupilles de la Société humaine; hommes perfectionnés
d'après la méthode anglaise pour les croisements.—Une
femme dépravée par les instincts de maternité et de
dévouement 138

DEUXIÈME JOURNÉE.
XIII.—Grand hôpital de Sans-Pair, construit pour les savants, les
médecins et le directeur. Dans la crainte de recevoir les
malades trop bien portants, on ne les reçoit qu'après leur
mort.—Réflexions de Marthe.—Les hommes jugés par le
docteur Manomane.—Les fous de l'an trois mille.—Les
ménageries et le jardin botanique 150
XIV.—Un cimetière à la mode.—Voitures établies en faveur des
morts.—Bazar funéraire.—Système d'impôts.—Epitaphes-
omnibus.—Un courtier mortuaire 172
XV.—Observatoire de Sans-Pair.—Comment M. de l'Empyrée
aperçoit dans la lune ce qui se passe chez lui.—Réunion de
toutes les Académies.—Utilité de la garde urbaine pour les
droguistes, les passementiers et les marchands de vin.—Ce
qu'il faut pour constituer des droits à un prix de vertu 181
XVI.—Mémoire d'un académicien de l'an trois mille sur les
mœurs des Français au dix-neuvième siècle.—Comme quoi
les Français ne connaissaient ni la mécanique, ni la
navigation, ni la statique, et mouraient tous de mort
violente par le fait des notaires.—Le Gouvernement chargé
de composer des épitaphes pour les célèbres courtisanes.—
Costume des rois de France quand ils montaient à cheval.—
Les noms des auteurs étaient des mythes.—Singulier
langage employé dans la conversation 192
XVII.—Le Grand Pan, journal universel, renfermant tous les
journaux et plusieurs autres.—Trois articles contradictoires
sur une seule vérité.—Administration du Grand Pan.—M.
César Robinet, entrepreneur général de littérature en tous
genres.—Machines à fabriquer les feuilletons.—M. Prétorien,
directeur en chef du Grand Pan.—Une entreprise littéraire
avec primes.—Blaguefort obligé d'acheter la critique du livre
qu'il veut publier 203
XVIII.—La Bibliothèque nationale et son catalogue.—Utilisation
de la promenade.—Ce que c'est qu'un artiste à Sans-Pair.—
Portraits à la grosse, avec ressemblance garantie.—M.
Illustrandini, statuaire de l'univers.—M. Prestet, peintre du
216

Gouvernement à pied et à cheval.—Opinion de Grelotin sur
la peinture
XIX.—Réforme dramatique grâce à laquelle la pièce est
devenue l'accessoire.—Transformations successives d'un
drame historique.—Première représentation.—Une loge
d'avant-scènes.—Analyse de Kléber en Égypte, drame en
cinq actes et à plusieurs bêtes 227
XX.—Ce que c'est qu'une réunion choisie.—Le grand critique, le
moyen critique, le petit critique.—Comme quoi l'homme qui
a fait le plus de veuves et d'orphelins est ce qu'on appelle
un homme de cœur.—Marcellus le Piétiste.—Conversation de
gens bien nés.—Séance de la société des femmes sages.—
Discours de Mlle Spartacus pour appeler les femmes à la
liberté 254
TROISIÈME JOURNÉE.
XXI.—Correspondance-omnibus de M. Atout.—Constitution
politique de la république des Intérêts-Unis.—Circulaire
électorale de M. Banqman.—Chambre des envoyés de la
république des Intérêts-Unis.—Crise ministérielle à propos
de moules de boutons.—Magnifique discours de Banqman
sur la question de savoir si l'armée aura ou non des gants
tricotés.—La Chambre vote tous les articles de la loi et
rejette l'ensemble 277
XXII.—Un missionnaire anglais.—Un bal public qui fournit les
danseuses.—Ce qu'on appelle l'Église nationale.—H. Coulant
expliquant sa religion à Narcisse Soiffard 299
Conclusion 311
FIN DE LA TABLE.

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