Ecology and Economics

How Much is a Tree Worth?

On April 18, the NY Times ran an article highlighting modeling by the Univ. of California at Davis and the US Forest Service — modeling that puts a monetary price tag (as "value") on trees. In this case the trees are public trees in New York City. Guess what? According to the model, for every dollar spent on trees in NYC the City receives $5.60 in benefits. Better invest now!

Where have I seen this before? I guess the first time was about thirty years ago when I learned the "economic value" of bird watching in the Southeast US. When one extrapolated from the local study area to the whole US, the "value" was high enough to easily retire the National Debt.

Then and now I remain on the sidelines, wondering why we continue to spend tax dollars on such. Of course Nature is valuable, nobody debates that. Our lives depend on keeping the planet's ecosystems functioning and the ecosystem services flowing. But we don't need to spend a bunch of dollars conjuring up "values' to feed cost-benefit calculations. Or maybe we do as long as that seems to be the only "currency" that matters in political deliberations. But I've said enough on the CBA score already. So let's just go to the article and see what others have to say:

Maybe Only God Can Make a Tree, but Only People Can Put a Price on It , David K. Randall, NY Times 4/18/2007: It seems like a Zen koan: how much is a New York City tree worth? Since New York's first park was created in 1733, the various incarnations of the modern Parks and Recreation Department have tried to quantify a resource that at best is viewed as inherently valuable, like sunshine, or at worst is chopped down.

"Trees are great for a variety of reasons, but how do you explain that to the Office of Management and Budget?" Adrian Benepe, the parks commissioner, has said.

Now, for the first time, the Parks Department can actually translate the value of the city’s trees into real dollars and cents. And as expected, it’s a big number. …

The program, called Stratum, was developed by researchers at the University of California at Davis and the United States Forest Service. It takes into account several factors, including a tree’s impact on local property values, its contribution to cleaning the air by absorbing carbon dioxide, and how much its shade helps reduce energy consumption.

Factoring in the costs associated with planting and upkeep, New York City’s street trees provide an annual benefit of about $122 million, according to the Parks Department. The study concludes that New York receives $5.60 in benefits for every dollar spent on trees. …

Dr. McPherson [lead designer of the model and director of the Forest Service's Center for Urban Forest Research] said … "I hope this model provides ammunition for people on the front lines who have to battle for budgets to maintain their trees and expand their urban forests"….

And I hope that somehow we can get a better conversation going that will help create "A caring Economics" as Riane Eisler suggests in her new book The Real Wealth of Nations. I'm sure that McPherson would agree on that end, but our means toward the end differ radically. I prefer deliberation and public decision-making methods that don't rely on conjured-up, monetized prices. Maybe McPherson does too. Still, he and others continue to feed the CBA beast.

A 'Stern' Look at Uncertainty, Novelty, and Surprise

Via Greg Mankiw: "Economists Joe Stiglitz, Nicholas Stern, and Martin Weitzman [PDF] have new pieces on global warming. The most interesting (as well as the most technically demanding) is the one by Weitzman. His conclusion: 'The Stern Review may well be right for the wrong reasons.'" I agree. In particular, I agree with Weitzman's conclusions. Here's a condensation:

… If the conclusion from the last section — that what to do about global warming depends greatly on the imposed interest rate — is seen as disappointing, then a second conclusion is likely to seem downright unnerving. …[E]ven if we had an infinite time series of past observations, they are of limited relevance in an evolving world where the environment is changing and the past never fully repeats itself. With this interpretation of the puzzles, people are willing to pay a lot for relatively safe stores of value that might represent a bit of insurance against out-of-sample or newly-evolved rare disasters.

There is little doubt that the worst-case scenarios of global warming are genuinely frightening. The Stern Review goes over several of these unlikely disasters associated with abrupt large-scale irreversible changes in the climate system: sudden collapse of the Greenland and West Antarctica ice sheets, weakening or even reversal of thermohaline circulations like the Gulf Stream, runaway amplification of global warming due to the many potential reinforcing feedbacks…. More gradual but still very serious are elevated sea levels, drowned coastlines, extreme weather patterns, flood risks, catastrophic tropical-crop failures, new humidity-nourished contagious diseases — and the list goes on and on.

Translated into the language of the simple model used here, such rare disasters are far out in the left tail of possible low, or even negative, or even possibly very negative values of …. The net result is thicker left tails for growth rates under dynamically-evolving global climate change than we are accustomed to dealing with in our much-more-familiar dynamic-stochastic-general-equilibrium macro models, which in practice are based upon the stationary thin-tailed stochastic processes that we use to model a rational expectations equilibrium whose structure is fully known. …

… [I]n lumping together objective and subjective uncertainties and thereby obscuring their distinction — to the extent that a graduate student today hardly knows, or even cares, what kinds of probabilities are legitimate to plug into a rational expectations equilibrium and what kinds of probabilities are illegitimate for this purpose — I think that contemporary economic practise goes too far and leads to a mindset that all-too-easily identifies subjective probabilities with sample frequencies from past data. …

… The upshot of this uncertainty about uncertainties is that [we are dealing with thick left tails] whose exact thickness depends not only on how bad a catastrophe global warming might induce and with what probability, but also on how imprecise are our probability estimates of the probabilities of those bad catastrophes. …

… [T]o ignore or suppress the significance of rare tail disasters in an application of expected utility theory like cost-benefit analysis of climate change, where there is so obviously limited data and limited information about extremes, is to ignore or suppress what theory is telling us is potentially the most important part of the analysis. … The take-away message here is that the burden of proof in the economics of climate change is upon whomever wants to model optimal-expected-utility growth under endogenous greenhouse warming without uncertainty tending to matter more than risk. Such a center-or-the-distribution modeler needs to explain why the necessarily-thickened tail representing rare disasters under uncertain structure does not play a critical role in the analysis. …

Ecosystem Goods/Services Valuation 101: 'Indicators Paradox' Revisited

Hassan Masum, David Zaks, and Chad Monfreda provide a good introduction to the valuation problem in their latest WorldChanging post on "ecosystem goods and services". Here is how they sum it up:

Ecosystem Goods and Services Series: Valuation 101, February 12, 2007: … Monetary estimates are easy to comprehend, but hide assumptions, approximations, and simplifications. They're also valid only at particular scales, and measure only certain kinds of value. On the other hand, they integrate information about supply and demand, however imperfectly — something more data-oriented valuation such as indicators or ecosystem models don't do explicitly.

A marriage of the two may be the way forward. When monetary values are used, misleading precision should be eschewed, and model assumptions clearly stated and summarized up front. And where monetary values are not useful, we need to develop comprehensive models with understandable summary statistics and indicators, that can be used directly to make policy tradeoffs without going through the intermediary monetary stage.

It's easy and comfortable to add up costs and benefits in a single, seemingly universal framework, and then to compare net benefits of different avenues of action to choose which way to go. But sometimes costs and benefits can't be translated into single values — too much is lost in the transition.

A more nuanced idea of valuation will let us use the powerful tools of financial planning where appropriate. And where financial planning is inappropriate, we can use indicators, models, and simulation approaches to compare the benefits of alternative courses of action in terms more directly linked to human well-being. At the end of the day, the challenges in really comprehending the true value of resources or the environment (or of an idea or social capital) should be approached with humility…as a long process of advancement, as our knowledge, wisdom, and experience grow.

The Indicators Paradox

Next week I wander up to very scenic, but very cold Jackson Hole, Wyoming to work with US Forest Service colleagues on monitoring and evaluation measures for a forest plan, related to an agency strategic plan, related to governmental obligations writ large for the US as part of the global community. Forest plan indicators must therefore, somehow, link to broader Criteria and Indicators for Sustainable Development.

I find the work paradoxical. Too often we come up with 'indicators' that don't indicate, but rather abstract too much or focus too narrowly. We find ourselves either overwhelmed by too many indicators, or tend to develop summary indices that conceal more than they reveal. Either way we lose. But maybe we, along with others are learning.

My continual prodding is that we need to address indicators in a functioning management system, where people both within government organizations and beyond can "own" (can resonate with) parts of the system, and relate parts to wholes in meaningful management settings. (Here, by the way is a little framing thing I'm working on titled Effective Organizations, linked to a "post" in my Adaptive Forest Management blog titled Rebuilding Public Trust.)

Years ago, I attended the first conference of the International Society for Ecological Economics, (Washington, DC, 1990) and listened to promises for greening up national income accounts, among other metrics to help policy-makers do better, and do more for "sustainability" re: ecology, economics and environment. I've been tracking "indicator" and "story line" progress and retrogress since. I even participate in minor ways, no doubt in both arenas, depending on who you talk to.

Yesterday, while prepping for my forest-related travels I decided to scan the Ecological Economics literature to see what I could find on recent developments. I was pleasantly surprised to find Accounting Technologies and Sustainability Assessment Models, In Press, Corrected Proof, Available online 22 December 2006, by Jan Bebbington, Judy Brown, and Bob Frame:

Abstract: Within ecological economics there is recognition of the need for new approaches to decision-making to support sustainable development initiatives. There is an increasing acknowledgement of the limitations of cost–benefit analysis approaches as a measure of the (un)sustainability of organizational activities. These are viewed as particularly inappropriate within the participatory settings that sustainable development proponents seek to foster. They also fail to deal with the highly contested nature of sustainable development discourse in contemporary pluralist democracies. While advances have been made in the field of multi-criteria decision-making, there is still a relative dearth of versatile models that accommodate monetization in a way that recognizes the limits of calculative technologies. This article introduces readers to developments within the accounting discipline designed to support sustainable development decision-making and evaluation. In particular, it proposes sustainability assessment models as a viable alternative to cost–benefit analysis. Sustainability assessment models are based on an inter-disciplinary approach that recognizes the need for “accountings” that facilitate more participatory forms of decision-making and accountability. As such, they address many of the weaknesses in current approaches to cost–benefit analysis. The authors’ first experiences with sustainability assessment models were with BP and the United Kingdom oil and gas sector, where models were developed as a means of making previously external costs more central to organizational decision-making. Later work has included exploration of a range of decision-making situations in private and public sector organizations in both the United Kingdom and New Zealand. This has involved more explicit attention to plural values and issues of participation, dialogue and democracy.

I was delighted to see this update on what I'll call "nails in the coffin" re: cost-benefit analysis. I have already been mining the "references" to update my own Critiques of Cost Benefit Analysis (embedded in this post along with 13 suggested books dealing with "CBA not!" and much more.)

I was even more impressed to see the authors carry the argument forward re: summary indices in the "social and environmental accounting" arena. I wish I could daylight the article, but I'm afraid it is in the "pay for view" category. I got to it via my 'Science Direct' subscription.

Ultimately, the authors endorse a social accounting medium that allows for practitioners, decision-makers, and the public to simultaneous test (in real life settings) various approaches to environmental/social accounting and evaluation, The vetting of various methods is immediate and ongoing, as interactive dialogue. Although I'm not yet familiar with the particulars I hope they somehow incorporate blogs (or blog-like feedback mechanisms) in the systems.

Let's hope that now more people will change focus toward value pluralism and civic discovery, i.e. "participation, dialogue, and democracy." Permit me one snip:

… In New Zealand, we have sought to explicitly address the issue of competing ideological orientations. By comparing how different stakeholders explain and illustrate their perspectives, we have encouraged actors to articulate their ideological standpoints on SD (e.g. their perspectives on monetization, the use of market valuation methodologies and views on the materiality of particular dimensions of SD). We see this as crucial in facilitating dialogic learning and interaction in polyvocal environments. We also envisage groups with different ideological orientations constructing their own SAMs. Separate SAMs rather than synthesis into a "unified" account leaves stakeholders with the ability to exchange SAMs as a way of explaining and justifying different courses of action and allows them to interrogate each others’ ways of knowing. We see this as important to protect against monologism and to provide a challenge to eco-modernist "business as usual" approaches.…

For the record, I find myself intrigued with summary indices like Ecological Footprint. Maybe it's the "star power." Take a look at Who's Who for the Global Economic Footprint Network. Alternatively, Amartya Sen's name is found among the proponents and developers of the Human Development Index. See, e.g. this [PDF] and this.

No doubt efforts at furthering development of more comprehensive indices have merit, as public and political discourse and more. And some of us will continue to follow the chatter (pro and con) that swirls around them. Some of us will also follow other efforts, some related to the more comprehensive measures, some not, where people try to make sense (political, social, and problem-solving) of various sets of measures, situationally defined and refined to fit whatever context is judged to be appropriate.

Stern Report Buzz

Almost three months after publication, The Stern Report on the costs of climate change still generates much buzz. Some of the buzz echoes methodological concerns we have aired earlier about use and abuse of cost-benefit analysis. (Or, if in a hurry: Top 10 Reasons why CBA fails ….) Here is an condensed version of Jane Galt's recent commentary:

Discount rates, again, Jane Galt, Asymmetrical Information, 01.09/2007: …[T]hough I essentially agree with the Stern Report's conclusions, I am bothered by its methods. …

It is really, really hard to price the costs of climate change. This is true for many reasons. First, some regions will benefit: Siberia and Canada will probably blossom under global warming. A true cost benefit analysis would net those benefits out, but how do you price them? How do you price losing Bangladesh? Is that a one-time loss, or should be impute to each generation a new cost for not being able to visit Bangladesh, and how do we counterbalance that against the new pleasures of visiting the Minnesota Tropical Rainforest? Should we take into account happiness research which indicates that people are roughly as happy after a big loss as they were before?

The uneven distribution of the benefits presents another pricing problem, particularly since there are wide income disparities between the affected countries. I'm not entirely clear which way this cuts, since Britain and Ireland get hosed along with Bangladesh, but it's hard to dodge the moral injustice that the United States, which produces more carbon per capita than these countries, may end up a net beneficiary of global warming.

The biggest problem is the easiest one to state: what is a cost and what is a benefit? How do you value the changes?

Economic Fundamentalism: Too Many False Prophets

Fred Argy provides a refreshingly different point of view on the debate about economics and science. Argy argues that maybe all of us – whether or not economists – ought to be aiming attacks primarily at economic fundamentalism:

[Beware of Economic Fundamentalism, Australian Review of Public Affairs, Mar. 31,2003] … There are too many false prophets in our profession—the kind who like to assert policy opinions in black-and-white terms, such as 'there is only one right way' and 'no other way will do'. This is what I like to call 'economic fundamentalism'. And I believe it is wrong on all counts.

For one thing, economics does not lend itself to doctrinaire policy assertions. The technical complexities are too great, the behavioural reaction of human beings too changeable and unpredictable, and the market subject to many imperfections. … [Many economic] questions do not lend themselves to definitive answers. The honest economist can make an 'on balance' judgment, but should also acknowledge the uncertainties and the merits of alternative positions.

Another reason why doctrinaire policy positions are unwarranted is that much of the day-to-day policy debate is not simply about economic choices. It is about normative values—the appropriate weight society should give to conflicting goals, such as freedom of choice, individual responsibility and self-reliance, equality of opportunity (what Australians call 'a fair go for all'), protection of the environment, and a sense of community.

Frankly, we economists have no special wisdom to offer on what should be the right balance between such goals. We can point to the economic costs and benefits of each option, but to go further and assert that one option is indisputably superior to all others is presumptuous. For example, will wage deregulation and welfare cuts have a big or small impact on employment, and how much pain will it inflict on low wage earners? Can the same employment outcomes be achieved through labour market programs such as wage and training subsidies, without the regressive effect on low wage earners? Again, will tax cuts have a more positive impact on community wellbeing than an increase in government spending? These are questions that are hard for economists to resolve because the alternatives being offered have very different distributional effects.

True professionalism requires economists to spell out the distributional as well as economic effects of each policy option, and then leave it to politicians to choose between them in the light of community preferences. …

One major risk of economic fundamentalism is that, like other forms of fundamentalism, it often breeds policy extremism. …

Another risk … is that it tends to widen the already large gulf between economists and the wider community. It encourages our critics to say that we are so obsessed with efficient markets that we have become insensitive to social and environmental concerns. …

When economists seek market-based solutions, they are discussing better means to given ends. Economic liberalism is consistent with a wide spectrum of ethical and philosophical values, and a wide range of distributional outcomes. So we need not be apologetic about our faith in competitive markets as instruments of allocation (where these are sustainable and do not involve disproportionate externalities). It is our critics who have got it wrong. Unfortunately, when some of our fellow economists seek to change society while masquerading as market economists, they give our profession a bad name.

To sum up, we have a proud and honourable profession. We need to defend it against external critics (on both the Left and Right) who attack our devotion to competitive markets without really understanding what we are on about. But equally, we should be vigilant in exposing the small but vocal band of extremists within our profession who take doctrinaire economic positions or, worse still, who push their own values under the false guise of economics. This is particularly evident in the current policy debate on labour market deregulation and welfare reform. The famous British economist Joan Robinson saw the danger clearly. She said that 'the purpose of studying economics is to learn how to avoid being deceived by other economists'.

So my advice to budding economic policy advisers is this: by all means be decisive in your day to day work, but when discussing policy don’t be afraid to be called a two-handed economist—'on the one hand this, and on the other hand that'. Wear it as a badge of honour.

Two questions: 1. How does one distinguish between "economic fundamentalists" and other practicing economists? We economists all tend to throw stones at others who are ideologically and methodologically different from us. Perhaps Argy is right is suggesting that we label as fundamentalists those "who like to assert policy opinions in black-and-white terms, such as 'there is only one right way' and 'no other way will do'."

2. How does one practice economics w/o being libeled as a fundamentalist? Here again Argy gives some useful clues when he says "[Many economic] questions do not lend themselves to definitive answers. The honest economist can make an 'on balance' judgment, but should also acknowledge the uncertainties and the merits of alternative positions."

One place where I tend to depart from Argy is his statement that "We can point to the economic costs and benefits of each option,". I agree in principle, but argue that we need to be very, very careful in our adding up costs and benefits of policy proposals. There are just too many things that prove too uncertain or too "contested" to be added up in any closed form way. Still I strongly agree with the rest of Argy's sentence, "but to go further and assert that one option is indisputably superior to all others is presumptuous."

Is the problem, in the main, that we have too many economic fundamentalists, "too many false prophets" in our profession? Do we need to get much better at self-policing?

As to "ecology fundamentalists," we will leave that topic for another day...

Why Do Government Economists Still Use Cost Benefit Analysis?

What is a decision-maker or a member of the "collaborative public" supposed to do with anything we government economists say under the banner “economic efficiency" as commonly used in Cost Benefit Analysis? How are we supposed to prove-up on any claims that something is "more economically efficient" than something else simply because it has a higher index number (PNV, B/C, etc)? The short answer in the US is that Benefit-Cost Analysis is pretty much required (OMB's Circular A-4 [PDF- 48p]) for many larger projects/programs/policies. Still, we can't just use "requirement" as a justification. Can we? OK, we can. But should we?

If we make such claims of "economics efficiency," why are we not also talking about "social efficiency," "environmental efficiency," and so on? In short, why would we want to talk about economic efficiency in any context other than then normal one of efficient operation of markets? To the extent we do want to talk efficiency at all, are we going to run our talk to ground by explaining, in appropriate context, the inherent relativity of "efficiency?" (See my four questions below).

I don't intend to answer any of these questions here. See instead my earlier posts: Cost Benefit Analysis Failings and Cost-Benefit Analysis: Wonder Tool or Mirage?, or better still the suggested readings below. As a personal aside, I haven't practiced "efficiency analysis" for many years, even before formally announcing my dissent from whatever mainstream there may have been in 1995. I do value my educational experiences wrestling with the efficiency theory and methods, however. They helped me to think more clearly, and to spend some considerable part of my professional life attempting to dissuade people from continuing to prop up government decisions with what seem to be in the main sophomoric cost benefit analyses. Here are links to my 1995 three-part series explaining my dissent from those who advocate for "efficiency analysis." You can read them in the order I provided them back then, or you can skip to my "Economic Advice" directly.

Design For a Sustainable Economics, Robert Gilman
Learning to Practice Economics in Context, Dave Iverson
Economic Advice for Forest Managers, Dave Iverson

In "Economic Advice" I suggest that we answer four questions when dealing with efficiency: Efficient at what? Efficient for whom? Efficient by what standard? Efficient for how long? (And then what?) The "And then what" question is asked repeatedly after any given response from an analyst or decision maker, to daylight the short sightedness embedded in most decisions. It is drawn from Garrett Hardin's little book Filters Against Folly: How to survive Despite economists, ecologist, and the merely eloquent.

Is there a better way to frame things? I think so. Wasn't that Aldo Leopold's plea when he suggested that we "[Q]uit thinking of land as solely an economic problem. Examine each question in terms of what is ethically and esthetically right, as well as what is economically expedient. A thing is right when it tends to preserve the integrity, stability and beauty of the biotic community. It is wrong when it tends otherwise."

This is the approach advocated by Green Economics.For more, see The GAIA Atlas of Green Economics. Here's Wikipedia's take on Green Economics. Green economics is built on a foundation of interdependence spanning local to global and spanning four spheres of action/influence: economics, society, ecology, and ethics. Specifically, "…The economy shapes and is shaped by the society and ecology of which it is a part. And all human activity is guided by ethical considerations, although ethical norms will change in response to economics, social and ecological influences. …" This notion of wholeness and interdependence is what we need to move from a non-sustainable to a sustainable platform for economics.

Can partial economic efficiency analysis help put us on a road to wholeness, interdependence aand a sustainable platform for economics? How? My answer is no. If your answer is yes, I'd love to hear why. If your answer is no, then you may have crossed a personal threshold toward sustainability.

PS. If you want to look deeper into critiques of CBA, take a look at this list of quotable quotes titled Critiques of Cost Benefit Analysis,

Suggested Reading:
Deborah Stone. 2002. Policy Paradox: The Art of Political Decision Making (revised edition).
Margaret Jane Radin. 1996. Contested Commodities
Thomas Prugh. 1995. Natural Capital and Human Economic Survival
James G. March. 1994. A Primer on Decision Making: How Decisions Happen
Elizabeth Anderson. 1993. Value in Ethics and Economics
Andrew Bard Schmookler. 1993. The Illusion of Choice: How the Market Economy Shapes Our Destiny
Herman E. Daly and John B. Cobb. 1989. For the Common Good
A. Allan Schmid. 1989. Benefit-Cost Analysis: A Political Economy Approach
Robert L. Heilbroner. 1988. Behind the Veil of Economics
Mark Sagoff. 1988. The Economy of the Earth: Philosophy, Law and the Environment
Andrew Sayer. 1984. Method in Social Science: A Realist Approach
E.F. Schumacher. 1977. A Guide for the Perplexed
E.F. Schumacher. 1973. Small is Beautiful: Economics as if People Mattered

Cost Benefit Analysis Failings: Short List

A while back I put together this "top ten list" as to why people like me don't like what we consider over-quantified and over-monetized Cost-Benefit Analysis. Posting them here might jump-start a discussion:

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Top Ten Reasons Why Cost Benefit Analysis Fails in Public Choice Settings!
Dave Iverson
(For more literature references, see my Critiques of Cost Benefit Analysis)

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1. Cost Benefit Analysis (CBA) favors the whims of economic analysts over moral judgments of society. Some claim that CBA replaces moral judgment with a "scientific method" for calculating individual preferences. I put scientific method in quotes, because in common practice, CBA often seems more akin to sorcery than science.

CBA views choice as instrumental, as means toward the end of achieving maximum satisfaction of consumer preferences. In truth, there are many important ends and many means toward any end. Every end is also a means to some other end; no action is purely a means, and no end is purely an end. It proves beneficial to discuss both means and ends, and to attempt to tailor means to ends. Often, however, the push for analysis crowds out dialogue and inquiry.

(See also my Economic Advice for Forest Managers. I champion public cost accounting as an input in public choice, and even support some comparison of costs to receipts. Still, in general I disdain most formalized CBA.)

2. Community and public interest do not show up in the CBA calculus. Instead, public interest is reduced to the sum of private interests.

3. CBA treats "consumers" as sovereign, and "citizens" as absent. Even if we were to ignore communal responsibilities and think only about individuals, there is more to life than markets. All substantive human and/or environmental issues have roots at least as deep in who we are as in what we want.

"Citizenship issues" must be entertained in public deliberation alongside "consumption issues."

4. Values are not "out there" for the plucking like fruit from trees. Social values are developed, shaped, and reshaped through public inquiry and deliberation as well as through direct experience in nature and society. In common CBA practice, by contrast, analysts take values as "given."

5. There is no straightforward way to weigh and balance what is "external" to the CBA calculation—so-called externalities—relative to what is included. Despite disclaimers, CBA in practice tends to ignore things external to the calculation. At a minimum there is seldom any explanation as to how phenomena internal to the calculation relate to phenomena external to it.

6. Equality, fairness, justice issues are ignored or given short shrift in CBA. Instead "trade framing" honors characteristics such as egoism, acquisitiveness, shrewdness, competitiveness....

CBA treats people as caricatures: as atomistic, egoistic, rational, utility maximizing consumers and producers. (Alternatively said, CBA treats people as "mechanistic, self-interest maximizers in a laissez-faire market" (from Margaret Jane Radin's Contested Commodities, at p. 219).

7. Discounting downgrades the importance of environmental regulation—it discounts the future. Despite disclaimers, the norm in CBA analysis is to discount at least some aspects of the future, rather than just to present "opportunity costs for capital," etc. (See also, "Pricing the Priceless: Cost-Benefit Analysis of Environmental Protection" [PDF, 305 kb].

8. Unwillingness to pay must be addressed alongside willingness to pay.Unwillingness to pay" (and particularly unwillingness to even allow markets to be constructed) must be addressed alongside willingness to pay and willingness to set up markets. CBA analysis does not allow for such.

9. In CBA calculations for public choice settings, we can never figure out who is supposed to be selling what to whom. "Willingness to pay" and "willingness to sell" (or "willingness to be compensated for") inquires lead to dramatically different numbers due to our psychological makeup. Normally risk adverse people, for example, will sometimes enter into high-stakes gambles to avoid big losses in what they now have. This dilemma remains even if we decide that markets are the name of the game and CBA the tool of choice.

10. Surprise and uncertainty are too profound to be reduced to futuristic numbers. How are we supposed to guess what the "future" is likely to be, and weigh and balance all in deterministic spreadsheet format? CBA requires such no matter how improbable or surprising the future may appear to us.

Top Ten Reasons Why Cost Benefit Analysis Fails in Public Choice Settings!
Dave Iverson
(For more literature references, see my Critiques of Cost Benefit Analysis)

Cost-Benefit Analysis: Wonder Tool or Mirage?

Cost-Benefit Analysis: Wonder Tool or Mirage [i]? Which is it? At the highest levels, the US government maintains that cost-benefit analysis is indeed helpful to sort out potential good v. bad of "significant regulatory action." [ii]  September 17, 2003 OMB Circular A-4 "guidance to heads of executive agencies" says,

A good regulatory analysis is designed to inform the public and other parts of the Government (as well as the agency conducting the analysis) of the effects of alternative actions. Regulatory analysis sometimes will show that a proposed action is misguided, but it can also demonstrate that well-conceived actions are reasonable and justified.

Benefit-cost analysis is a primary tool for regulatory analysis[2]. Where all benefits and costs can be quantified and expressed in monetary units, benefit-cost analysis provides decision makers with a clear indication of the most efficient alternative, that is, the alternative that generates the largest net benefits to society (ignoring distributional effects). This is useful information for decision makers and the public to receive, even when economic efficiency is not the only or the overriding policy objective.

It is not always possible to express in monetary units all of the important benefits and costs. When it is not, the most efficient alternative will not necessarily be the one with the largest quantified and monetized net-benefit estimate. In such cases, you should exercise professional judgment in determining how important the non-quantified benefits or costs may be in the context of the overall analysis. If the non-quantified benefits and costs are likely to be important, you should carry out a "threshold" analysis to evaluate their significance. Threshold or "break-even" analysis answers the question, “How small could the value of the non-quantified benefits be (or how large would the value of the non-quantified benefits need to be) before the rule would yield zero net benefits." In addition to threshold analysis you should indicate, where possible, which non-quantified effects are most important and why. (p. 2, [2]: references E.J. Mishan’s book, Cost-Benefit Analysis, 1994)

There are many economists who believe cost-benefit analysis to be very helpful in government rulemaking and other regulatory efforts. But many others are not so sure that detailed cost-benefit analysis is either warranted or even helpful. Some argue that far from being helpful, such analysis is in fact often harmful to disadvantaged individuals and groups, and to the environment.

The latest manifestation of long-standing criticism of cost-benefit analysis, comes in the form a book by Frank Ackerman and Lisa Heinzerling titled Pricing the Priceless: Knowing the Price of Everything and the Value of Nothing, 2004.

In the fall of 2004, Carrie McLaren of Stay Free! Magazine interviewed Frank Ackerman and Lisa Heinzerling about Priceless: http://www.stayfreemagazine.org/archives/23/priceless.html