Benefit-Cost Analysis of Environmental Projects: A Plethora of Systematic Biases

33 Pages Posted: 28 Jul 2010 Last revised: 14 Mar 2012

See all articles by Philip E. Graves

Philip E. Graves

University of Colorado at Boulder - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 5, 2012

Abstract

There are many reasons to suspect that benefit-cost analysis applied to environmental policies will result in policy decisions that will reject those environmental policies. The important question, of course, is whether those rejections are based on proper science. The present paper explores sources of bias in the methods used to evaluate environmental policy in the United States, although most of the arguments translate immediately to decision-making in other countries. There are some “big picture” considerations that have gone unrecognized, and there are numerous more minor, yet cumulatively important, technical details that point to potentially large biases against acceptance on benefit-cost grounds of environmental policies that have true marginal benefits greater than true marginal costs, both in net present value terms. It is hoped that the issues raised here will improve future conduct of benefit-cost analyses of environmental policies.

Keywords: benefit-cost analysis, environmental policy, decision making, choice behavior, public goods, willingness-to-pay, willingness-to-accept, precautionary principle, hedonic methods, sum of specific damages, health effects model, environmental perceptions

JEL Classification: C91, D12, D61, D62, D78, D81, H11, H41, H43, Q20, Q30, Q51, Q58

Suggested Citation

Graves, Philip E., Benefit-Cost Analysis of Environmental Projects: A Plethora of Systematic Biases (March 5, 2012). Available at SSRN: https://ssrn.com/abstract=1649309 or http://dx.doi.org/10.2139/ssrn.1649309

Philip E. Graves (Contact Author)

University of Colorado at Boulder - Department of Economics ( email )

Campus Box 256
Boulder, CO 80309-0256
United States

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