Cost-Benefit Analysis and Nonmarket Valuation (ESM 245)

Bren School of Environmental Science & Management

University of California, Santa Barbara

Fall 2007

Professor: Matthew Kotchen

Office: 4420 Bren Hall

Phone: 805-893-8668

Email: kotchen@bren.ucsb.edu

Class meetings: Tu & Th 2:00-3:15 pm 1424 Bren Hall

Office hours: W 2:00-3:30 or by appointment

Course Objectives

Cost-benefit analysis provides a framework for conducting economic analysis of public policy. The application of cost-benefit analysis to environmental and natural resource policy is both common and controversial. This is a course in cost-benefit analysis broadly conceived. We will cover the underlying theory of social decision-making based on a comparison of economic costs and benefits. We will consider numerous applications in the context of environmental and natural resource management. In many cases, as we will see, this requires an understanding of the methods of nonmarket valuation. Hence we will spend time covering the theory of nonmarket values and the methods for estimation in the context of environmental and natural resources. Students will learn the skills necessary to conduct original cost-benefit analyses and to evaluate cost-benefit studies conducted by others. Additionally, students will gain an appreciation for the potential advantages and disadvantages of cost-benefit analysis, along with its relation to other approaches for decision-making about environmental and natural resource concerns.

Course Materials

There is no required text or reading packet. All reading material will be made available in advance online (linked below) or on paper.

Course Requirements

You are expected to complete all of the assigned reading before class, as lectures will build on, rather than reiterate, reading material. The aim is to have much of class based on discussion, so being prepared will be important. There will be a midterm and final exam, and both will be given in class. Students will also be required to write a term paper that can take one of three forms: 1) an original cost-benefit analysis on a topic of your choosing, 2) a detailed proposal for an original cost-benefit analysis on a topic of your choosing, or 3) a detailed critique of an existing cost-benefit analysis of your choosing. Papers are to be concise and not to exceed 12 pages double spaced. We will discuss further details about term papers as the quarter gets underway.

Midterm Exam: Tuesday, November 6^th, in class.

Final Exam: Monday, December 10^th, 9-12 am.

Term paper deadline: Friday, December 14^th, at 5:00 pm.

Course Grades

Course grades will be based on class participation (10%), a midterm exam (25%), and a final exam (30%), and a term paper (35%).

Tentative Course Outline and Reading List

What is Cost-Benefit Analysis (CBA) and Why Is It Important?

A CBA Interpretation of Microeconomics

• Review notes from ESM 251: Microeconomics Principles for Environmental Management.

A CBA Interpretation of Environmental Policy

• Fullerton (2001) "A Framework to Compare Environmental Policies," Southern Economic Journal 68, 224-48.

The Role for CBA in Developed and Developing Countries?

• Arrow et al. (1996) “Is There a Role for Benefit-Cost Analysis In Environmental, Health, and Safety Regulation,” Science, 272, 221-222. [See next link for reprint of this paper.]
• Special Policy Forum (1997) “Benefit-Cost Analysis and the Environment in Developing Countries,” Environment and Development Economics, 2, 195-221.

Foundations of CBA

• Pearce et al. (2006) Chapters 1&2: “Introduction” and “The Foundations of Cost-Benefit Analysis,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.

• Pearce et al. (2006) Chapters 3&4&15: “The Stages of a Practical Cost-Benefit Analysis,” “Decision Rules,” and “Equity and Cost-Benefit Analysis,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.

A Bit on the Cost Side of CBA

• Pearce et al. (2006) Chapter 5: “Policy and Project Costs,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.
• Porter and van der Linde (1995) “Toward a New Conception of the Environment-Competitiveness Relationship,” Journal of Economic Perspectives.
• Friedman (2007) “Lead, Follow, or Move Aside,” NY Times, Sept 26.
• Palmer et al. (1995) “Tightening Environmental Standards: The Benefit-Cost or the No-Cost Paradigm?” Journal of Economic Perspectives.

Environmental Benefits

• Krutilla (1967) “Conservation Reconsidered,” American Economic Review.
• Pearce et al. (2006) Chapter 6: “Total Economic Value,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.
• Nelson (1996) “How Much is God Worth? The Problem—Economic and Theological—of Existence Value,” working paper, Competitive Enterprise Institute.
• Kotchen and Burger (2007) “Should We Drill in the Arctic National Wildlife Refuge? An Economic Perspective,” Energy Policy.
• Kotchen and Burger (2006) “’$elling’ the Arctic Refuge Without Selling Out.”
• Slides.

Stated Preferences Via Contingent Valuation

• Pearce et al. (2006) Chapters 8: “Stated Preference Approaches I: Contingent Valuation Method” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.
• Pearce et al. (2006) Chapters 11: “Willingness to Pay vs. Willingness to Accept” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.
• Kotchen and Reiling (2000) “Environmental Attitudes, Motivations, and Contingent Valuation of Nonuse Values: A Case Study Involving Endangered Species,” Ecological Economics.
• Rubin et al. (1991) “A Benefit-Cost Analysis of the Northern Spotted Owl,” Journal of Forestry.
• Slides.

Revealed Preference Approaches to Valuation

• Pearce et al. (2006) Chapter 7: “Revealed Preference Methods for Valuing Non-market Impacts,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.

• Michael et al (1996) “Water Quality Affects Property Values: A Case Study of Selected Maine Lakes,” Maine Agricultural and Forest Experiment Station Publication 398.
• Schmidt and Courant (2006) “Sometimes Close is Good Enough: The Value of Nearby Environmental Amenities,” Journal of Regional Science.
• Tobias and Mendelsohn (1991) “Valuing Ecotourism in a Tropical Rainforest Reserve,” Ambio.
• Abdalla et al. (1992) “Valuing Environmental Quality Changes Using Averting Expenditures: An Application to Ground Water Contamination,” Land Economics.
• Slides.
• Slides.

Valuing Health and Life

• Pearce et al. (2006) Chapter 14: “Valuing Health and Life Risks,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.

Benefits Transfer

• Pearce et al. (2006) Chapter 17: “Benefits Transfer,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.

• Kotchen et al. (2006) “Environmental Constraints on Hydropower: An Ex Post Benefit-Cost Analysis of Dam Relicensing in Michigan,” Land Economics.
• Slides.

Discounting and Sustainability

• Pearce et al. (2006) Chapter 13: “Discounting,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.
• Solow, “An Almost Practical Step Toward Sustainability,” Text of an Invited Lecture at Resources for the Future, 1992.
• Pearce et al. (2006) Chapter 16: “Sustainability and Benefit-Cost Analysis,” in Cost-Benefit Analysis and the Environment: Recent Developments, OECD.

An Interdisciplinary Application of Cost-Effectiveness Analysis

· Halsing and Moore (forthcoming) “Cost-Effective Recovery Strategies for Snake River Chinook Salmon: A Biological-Economic Synthesis” Conservation Biology.

Other Topics Depending on Time Remaining