Monday, March 10, 2008

ECON 260: Comment Thread for 3/12

Please read this brief debate between Kerry Smith and Frank Ackerman/Lisa Heinzerling regarding the use of cost-benefit analysis in determining environmental policy.

What do you think? Is cost-benefit analysis a useful tool for informing environmental policy? To what extent is it useful? I.e., should policy makers be forced to conduct them before making policy? Should they be forced to follow the results of the analysis? If they don't have to follow their conclusions, how should they be used?

Here an additional reading from the "pro" side that you should also read -- several big shot economists on "Is there a role for cost-benefit analysis in environmental, health, and safety regulation?"

From this back and forth debate on the usefulness of cost-benefit analysis one thing become clearer to me. A major problem in this debate is the simple fact that people think differently. To Smith, it is obvious that the cost-benefit analysis makes sense to him as tools to not only make the big policy decisions, but to make decisions in life. While Ackerman & Heinzerling find it absurd to use this type of analysis to make simple decisions, let alone big ones. Those who think in a cost benefit analysis will better understand all of the uncertainties that lie within it as well. While those of us who don’t make those kinds of decisions on a daily basis (which can include the politicians making the decisions), might make a decision for the best policy on the basis of the hard numbers given.

While I can concede I see the usefulness at times of the cost benefit analysis, as Smith points out, how else will some policies be decided. It would be great to find a lens through which to look through that those who don’t weigh every option could utilize to decide on the policy. This seems to have been impossible so far, so I think that the analysis can be a useful tool. However, as Goodstein points out, the uncertainty of many analyses is often ignored. This can be a problem for the public that only gets the end result of which policy is more efficient.
I'd say that I'm most swayed by Smith in the debate. Ackerman and Heinzerling's argument against cost-benefit analysis does little to provide an alternative. It seems that they present two primary arguments: the first is that it's impossible (and somewhat inhumane) to monetarily quantify one's life, family members, religion, etc; and the second, is that even if these things are given a price, it is often inaccurate. Smith counters the first argument by saying that we're not always asking people to think about life in dollars, but rather to think about trade-offs. In this way, Smith is showing how we can measure peoples' "revealed preferences."

Ackerman and Heiz. present a more solid problem with cost-benefit analysis when they discuss accuracy. They argue specifically against the inaccuracy that results from methods that use "stated preference" (i.e., contingent valuation). In this example they argue that censorship and the freerider problem can cause surveys to become inaccurate. As we've learned there are also problems with correctly measuring a "revealed preference." In general cost-benefit analysis can be riddled with problems, but as long as we recognize their shortcomings, I think they can be useful. They don't have to be followed exactly, and perhaps shouldn't be, but at least they provide another insight into the complexity of a policy decision.
To finish, I'll pose a question:
Do you guys see evidence in the reading that Ackerman and Heiz. are proponents of the safety or ecological sustainability standard? If so, what do they say about it?
To me, this is a one sided argument in favor of Smith. Ackerman and Heinzerling suggest that cost benefit analysis does not work because it is not possible to place monetary values on health and human lives and whatnot. However, they provide zero alternatives to the cost benefit analysis.

I agree with Stephanie that Ackerman and Heinzerling bring up one legitimate point, being the accuracy of the CV surveys used to measure cost benefits. The ideas of public goods and free riding are presented. Also, as Stephanie mentions, the idea of censorship. To me, it is obvious that cost benefit analysis has its drawbacks which Smith states in his argument, "It is not perfect, just the best we have."

Until there is a better method suggested, cost benefit is the best fit for suggesting possible policy matters and decisions.
I like how A&H fault cost-benefit analysis based on a human distortion of data and misrepresentation of results, yet offer only policy based on a vague notion of "public opinion" as an alternative. Their argument gets weaker still as they attack the foundation of economics itself, the notion of scarcity. As affluent as America is, allocating finite resources will always require some sort of trade-off, and to make that trade-off based on the American people's gut feeling, rather than the best estimates we have of the costs and benefits involved, seems foolhardy.
It appears that Ackerman and Heizerling's aversion to BENEFIT-cost analysis has much deeper roots that clearly stem from their absolute disdain for the Bush administration and everything that goes with it. Their comment threads where riddled with slanderous and generalized opinions, coupled with a baseless suspicion of survey methods and statistics. I found their argument very hard to take seriously. They just seem so angry and confused, cost-benefit is not a "political tool used to undermine regulation", there is no big (and probably in their minds evil) man sitting in a smokey mirror filled room behind his desk, distorting survey questions and making up public opinion. We use this analysis because these are not clear cut issues and because opinions are not the same, we don't all value the environment above everything else as implied by A&H. Smith helped to keep it real with his example of saving the rainforests or coral reefs. C/B is far from perfect, but a rough guide is better than nothing, even if the survey questions are loaded and my environmentally conscious answer is thrown out by the corrupt politician. And furthermore, what's all this about the costs being borne by polluting industries? have they never heard of passing it on to us, the consumer?
In my humble opinion A&H need to calm down, enjoy the beautiful and priceless environment we have left, and wait for Obama or Hilary to save us from the wrath of the republicans and their love of warmer weather!
A&H's critisism of the bush administration is misplaced. Instead of blaming the existence of cost-benefit analysis, the authors should examine the source of this cost-benefit analysis. As we have discussed in class, there are many different methods for calculating costs and assessing benefits and the firm that assesses these values has a potential for bias. As for undervaluing human beliefs and morals, I think that cost-benefit analysis is just as likely to over-estimate as it is to underestimate.
Although the debate touches on inaccuracy, I don't think they ever mention different methods. There can't be only one "correct" cost-benefit analysis for every solution, can there?
The cost benefit analysis is one of the first methods of comparing things that I learned in Econ. It was always just accepted in my head as an appropriate way to look at a situation, until I saw it being put to use with something that actually mattered to me, environmental issues. The fact that we can put numbers to things like people’s lives and to habitats that are supposed to mean something is beyond my comprehension. Because of this, I believe that we should not use this method of comparison, but I have a hard time with any method, as they all do the same thing. Put numerical values where there should be none. So how do we deal with this? I cannot begin to understand. So where do I stand in the argument? The cost benefit analysis is one that is in the eyes of the beholder, because every one is subject to their own bias, but this is probably true with any analysis. So maybe this one is as good (or bad) as any other, as what I could say about this one applies to all the others as well.
I definitely like how this article showed conflicting views about the use of cost-benefit analyses. However, I think that their arguments fail to understand that a cost-benefit analysis is merely a means, not an end. Even if we place value on human life, family, or religion, it does not mean that monetary value will stick. Given the circumstances, and the fact that no other method has been brought forward, I believe that cost-benefit analyses should continue to be used, as long as their projected outcomes are free of biases and truly consider all sides of an issue.
Ackerman and Heinzerling throw around a lot of accusations about cost-benefit analysis being bunk because the current presidential administration uses it for their own anti-environmental policies, but not to make other political decisions, e.g. the Iraqi war. The believe decisions should be made by the people, i.e. through polls, rather than abstract economic measurements. However, Smith discusses how cost-benefit analysis is a tool that provides as much information as possible, enabling us to make more informed decisions, but that it does not MAKE the decisions for us. I would argue that cost-benefit analysis, while abstract, does give us an informed and objective advantage for making decisions. It has its flaws - sometimes people exaggerate their willingness to pay or accept in contingent valuation surveys and the statistical value of life measurement does not take into account involuntary risks or non-risk based measurements - but overall it enables us to objectively compare benefits and costs of a particular decision.

However, it should be noted that Smith believes cost-benefit policy does not make decisions for us. Therefore, policy makers can decide to change the numbers or decide against what a study might suggest they should do. On one side, supporters of the safety standard and ecological standards would not choose the efficient level in order to protect the environment and human safety, so why is the government at fault if they chose a policy that has more costs than benefits? I think this is an important question to raise, but my utopian vision is that the government would follow cost-benefit analysis unless human safety or ecological well-being is at stake.
I agree with Smith that the virtue of cost-benefit analysis is that it helps compare options for actions. We don't have the resources to solve every problem facing our country and world at once, so we must prioritize problems and cost-benefit analysis can provide a way to make decision making easier. It may be not be the most reliable decision making tool in the world, but it just may be the most reliable one we have today to make these decisions.
They can also be seen as supplements to the decision making process. The Endangered Species Act places the benefits of preserving a species higher than any of the costs that might be incurred by preservation, not because the monetary benefits necessarily outweigh the costs. Rather, we decided, in the sort of public opinion framework that Ackerman and Heinzerling promote, that the species preservation is more important than our economic losses, thus the cost-benefit analysis framework incorporates public opinion through factors like use and option value. I think that you can use cost-benefit analysis to great effect in environmental regualtion if you remember to include these harder to monetize costs and benefits.
I think that cost-benefit analysis should often be used as a tool for informing environmental policy. But maybe more in the sense that it is one tool in the tool box, probably a pretty important one like a wrench or something, but still not quite at hammer status. In general, I find myself often agreeing with Smith that cost-benefit analysis can do a lot to inform decision making by bringing the multi-faceted benefits and costs into the picture. Nevertheless, no cost-benefit analysis will ever be able to accurately take into account every factor, especially those factors that are hardest to place a monetary value on. For the most part, and when possible, using a cost-benefit analysis to inform environmental policy is a good idea, but only in as much as it is used as just one of many tools. Using public opinions polls, although they still have their faults, are helpful in creating the best informed policies, because they can often account for costs and benefits not calculated into cost-benefit analysis.
I think cost benefit analysis is certainly useful. As smith points out, cost benefit is not used as the only decision making but rather as information to help make a choice Because of the way our country is set up (extreme reliance on monetary values) we need to use cost benefit analysis. Blindly giving the OK to policies on the grounds of fairness I feel is a recipe for disaster. Before we know it our country could go bankrupt and there would be no government in place to enforce the policies that caused the problems.
“Without cost-benefit calculations, we are not helpless or indecisive; without help from economists, ordinary people think profoundly and come to reasoned judgments about threats to life, health, and nature, and about our obligations to future generations. These are among the most important issues of public policy, and the record of environmental improvement over the last 30-odd years is one that we can all be proud of.”

Can we really say that collectively we are proud of what we’ve accomplished? While we are not helpless to make decisions w/o cost-benefit analyisis, there are still debates about what level of protection and regulation to provide. There needs to be some sort of structure to argue within, otherwise we are comparing apples and oranges and it may take even longer to accomplish anything.

Smith’s point that “Cost-benefit analysis offers information for these types of choices. It is not intended, even by its most ardent advocates, as an exclusive basis for public decisions; rather, it provides one type of information,” is an important distinction. Cost-benefit analysis isn’t meant to dictate policy directly – in some cases the verdict of the analysis may not actually dictate what the public policy decision will be; but, it has provided some information to help make this decision, or even to force people to really think about what the implications of policy are.

While I agree that problems with the system of cost-benefit analysis in the form of bias and purposeful manipulation to reach political ends can often make the information hardly useful, and sometimes harm the decision making process in terms of legitimacy, this is a different problem. Smith states, “but remember, cost-benefit analysis lays the cards are on the table, so we can see what gets counted and what does not. Cost-benefit analysis should never be the exclusive basis for public policy choices. It's not perfect; it's just the best we've got.” I think that if we take cost-benefit analysis for what it is and consider the results as one tool in decision-making processes, it is a valuable one.
I found the dialogue in this debate very interesting because I found myself agreeing occasionally with both sides. I do think that the Bush administration while using cost benefit analysis has decreased its standards on the environment on numerous topics. Also that the results are narrow given the limits of monetary valuation, but I agree with Smith in the respect that policymakers should not fully throw out this method. Contingent valuation does not seem to be sufficient or quanitatively substantive to permit the legislation of policies so some method must be used. I believe that a case by case analysis and can put the best method into context. I found myself asking while reading, what would the state of the environment be like if the Bush administration not even attempt to weigh cost and benefits and simply do what they arbitrarily thought based on the who would have more of an impact on their re election of political popularity.
My knowledge of cost-benefit analysis is limited to what I have learned in this class, therefore I am open to hearing both sides and hopefully formulating an opinion of my own. Solely regarding this article, both arguments were well-articulated and supported but I think Kerry Smith came across as more credible and convincing. He seemed less biased by defending cost-benefit analysis but also acknowledging its downfalls. Consequently, after reading this article, I think cost-benefit analysis is a good tool in evaluating possible policy decisions, but it is not the only tool. Placing a monetary value on things is a concise and understandable way for people to interpret information. It is common language that people from different fields can appreciate and understand. I don’t think it should be the sole indicator of policy decisions as Smith pointed out. Needless to say, I don’t think policy makers should be forced to follow the results of analysis. Cost-benefit analysis should be used as a tool to present the full consequence of a decision. It is a way to present the positives and negatives of a decision in one document. Policy makers can take it or leave it but ultimately rationale and thoughtfulness should guide their decision.
It seems that several people have chosen to side with Smith because of the lack of alternatives proposed by A&H. If we are thinking in the short term and accepting a truth in the "way things are"... okay, you're right, A&H don't make a good argument.

On the other hand, I'm still fundamentally haggard by the idea that policy decisions are being made on such terms. There is a pretty famous ecologist named Daniel Botkin I'm sure many of you have heard of before who wrote a somewhat notorious article in the NYT about how scientists are irrationally freaking out about temperature increase data charts. He makes a pretty good argument and has a fairly sound framework from an ecological perspective. Yet, in my ecology class we are not questioning global warming. In fact Botkin quoted a colleague who said something like, "Doesn't the wolf deceive its prey?" to justify the scare tactics used in media today.

The point is, scientists are not in agreement about most things. This is probably due to human nature as well as a lack of understanding. Trouble is - we won't be able to understand many things for a long long time but we still have to make policy.

Ultimately, I think that instead of a bunch of different ecologists being hired by separate parties to prove a desired point... there should be a more holistic approach. I suppose by saying this I'm basically, I'm asking people to stop fighting for their pocketbooks and instead sit down and discuss together what environmental impact could happen. Maybe the ecologists should talk to each other instead of the economists who may only be taking baised studies to a powerpoint presentation with a pocket full of money from a large corporation. My point is thus moot, but I still don't like cost-benefit analysis and think that it is relatively worthless in the grand scheme of things. But sure, in the short run, it can show the economical differences between idea A and idea B.
Well I was going to leave a comment slamming S&H, but apparently everyone else already beat me to it.

So I'll switch sides and say that they do make a good point: why is it that cost-benefit analyses almost always anesthetize environmental regulation? As they quickly point out, non-market goods are likely to be undervalued because there is no rubric by which we can monetize them.

Sure, they provide no obvious alternative, but this doesn't take away from the fact that cost-benefit analyses are seriously lacking in their validity. Their suggestion that some goods are priceless would leave only one alternative: spend as much money to fix a problem as necessary.

Given the right conditions, this *could* be possible. And if you want to talk about a lack of cost-effectiveness, look no further than the Iraq War..
Considering megan’s response, I wanted to say that I think that cost-benefit analysis has its earned place as an economic instrumentation used to analyze the relationship between humans and non-humans. However, as Megan is getting at, I think that in the bigger picture, this tool is just one part of a larger democratic discussion we must have in evaluating a regulation (the economists and their tools of benefit-cost analyses must also be weighed in with the documentation and theories of scientists, politicians, moralists...for example). Only then, can we get a better understanding of the effects of a proposed environmental policy. As it been agreed upon in this forum, the analysis does have an important role, but should not be the sole basis in determining regulations.
As the online assumption game illustrated today, clearly benefit-cost analyses are very dependent on the assumptions you make. While I understand how A&H can believe them to be too unreliable, I have to side more with Smith. The economists' 8 Principles do a good job of explaining why and how B-C analyses should be done. I think these analyses are useful and with much peer review can be trusted enough to aid in the decision making process.
I think that C/B analysis should be used as a tool for analyzing policies, but only as one part of making a bigger decision (which seems to be the general consensus here in the forum). C/B analysis gives us some (although not always completely accurate) insight into the way people feel about the choices at hand. But because of the possible inaccuracies in C/B analysis, I feel it should never be used as the sole determinant in policy decisions. Policy makers need to use rational thought as well as C/B analysis to be able to look beyond the pure monetary value of costs and benefits. Obviously, they are going to be clearer in some situations then in others and it will take more then just the C/B analysis to reach the right decision.
Smith seems to be coming from a sound place when he says that the analysis does not make any choice - that evaluating the cost-benefit ratio of a situation should be only a part of the decision making process. There is the danger of planning to use cost-benefit as only part of the process and seeing it play out as the only piece being used in decision making. However, in our textbook Eban cites two examples (lead in water pipes and lining of garbage dumps) where the cost-benefit analysis was used as only part of the process.

Frank Ackerman & Lisa Heinzerling give a decent reply to these issues though by reemphasizing the role of emotion in making decisions - something that I feel I have been taught to suppress throughout my economics classes. They seem to reemphasize the role of intuition - something that has been tossed out as illogical by economists.
Ackerman and Heinzerling seem to have a problem less with the cost-benefit analysis as they do with the Bush administrations use of it to justify things that appear to be out of line with the public opinion. Still, just like any tool, cost-benefit analysis has the potential to be misused.
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