Monday, March 10, 2008
ECON 260: Comment Thread for 3/12
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?"
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.
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?
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.
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!
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?
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.
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.
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.
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.
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..
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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