Cost-Benefit Analysis and Nonmarket Valuation (ESM 297-3)

Bren School of Environmental Science & Management

University of California, Santa Barbara

Fall 2009

Professor: Matthew Kotchen

Office: 4420 Bren Hall

Email: kotchen@bren.ucsb.edu

Office hours: Immediately after class 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 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. 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. Furthermore, much of the class will be based on discussion, so being prepared will be important. There will two assignments (dues dates below). These will involve analytical problems or short writing exercises. There is also a final exam, in class with date to be determined.

Course Grades

Course grades will be based on assignments (35%) and the exam (65%).

Class Meeting Times

Monday	Tuesday	Wednesday	Thursday	Friday
Nov 2 Lec: 5 – 6:15	Nov 3 Lec: 11 – 12:15	Nov 4 Lec: 4 – 5:15	Nov 5 Lec: 11 – 12:15	Nov 6
Nov 9 Lec: 5 – 6:15	Nov 10 Lec: 11 – 12:15	Nov 11 No Class	Nov 12 Lec: 11 – 12:15	Nov 13 Assig. #1 due
Nov 16 Lec: 5 – 6:15	Nov 17 Lec: 11 – 12:15	Nov 18 Lec: 4 – 5:15	Nov 19	Nov 20 Assig. #2 due

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

• Kotchen, M., “Cost-Benefit Analysis,” in Encyclopedia of Climate and Weather, 2^nd Edition, S. Schneider (ed.), Oxford University Press, forthcoming, 2010.
• Field and Field, Chapter 5: The Economics of Environmental Quality

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.
• 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 (2008) “What Would Environmentalists Do with ANWR?,” Op-Ed in The San Diego Union-Tribune, July 18

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 (1998) Estimating and Questioning Economic Values for Endangered Species: An Application and Discussion, Endangered Species Update.
• Rubin et al. (1991) “A Benefit-Cost Analysis of the Northern Spotted Owl,” Journal of Forestry.

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.
• Tobias and Mendelsohn (1991) “Valuing Ecotourism in a Tropical Rainforest Reserve,” Ambio.

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.

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.

Other Topics Depending on Time Remaining