AUTHOR: JAMES SHORTLE Department of Agricultural Economics and Rural Sociology,

1. Integrating Ethics into Graduate Training in the Environment Sciences Series Unit 4: Ethical Dimensions of Benefit-Cost Analysis in Environmental Project and Policy Evaluation AUTHOR: JAMES SHORTLE Department of Agricultural Economics and Rural Sociology, The Pennsylvania State University With input from Nancy Tuana, Ken Davis, Klaus Keller, Michelle Stickler, Don Brown, and Erich Schienke

2. Benefit-Cost Analysis (BCA) • An analytical technique for evaluating the economic efficiency of projects or policies based on evaluation of economic benefits and costs • Has become common in the U.S. and other countries • Widely used by EPA and Congress for many statutes in the US. (Hahn 2000 & Adler and Posner 1999)

3. Ethical Issues in BCA • Issues within the welfare economics paradigm • BCA is emerges from an explicit set of value judgments • Ethical issues arise when applications and uses are inconsistent with the underlying norms • Issues about the paradigm • Disagreement with the underlying value judgments • Conduct of BCA

4. Uses of BCA • Ex ante evaluation • Systematic & logically consistent accounting of impacts • Tool for ranking competing projects or policies • A filter for negative sum rent seeking projects, • Inform policy makers about economically efficient outcomes • Ex post evaluation • How well did policies actually work? • Tool for improving future policy based on actual experience

5. Normative Foundations of BCA • BCA emerges from an explicit normative foundation that seeks to answer the fundamental question of applied welfare economics: What is the impact (both sign and magnitude) of a change in resource allocation on social welfare?

6. The Values of Welfare Economics • Social welfare is an aggregation of human welfare • Any consideration for nature in BCA is a derivative of the contribution of the same to human welfare • Individual human welfare is a function of “goods” consumed • The focus is on outcomes, not procedures • Individual’s preferences are the basis for evaluating their welfare outcomes • Individual’s preferences are the basis for evaluating their welfare outcomes • Consumer sovereignty • No moral judgments about individual preferences

7. Evaluation of Social Welfare Change • Simple cases – welfare impacts are beneficial or detrimental for all • If beneficial, such a policy/project would either have all favorable votes or some favorable but no unfavorable votes in a referendum • If detrimental, the reverse would be true • Contentious cases – changes in resource allocation benefit some, harm others • Such a policy or project would have some favorable and some unfavorable votes in a referendum • Question: • How to evaluate these cases?

8. Criteria for evaluating social welfare change • Pareto Criterion • Compensation Criteria • Samuelson-Bergson Social Welfare Functions

9. Pareto Criterion • Given two social states A & B, B is preferred to A if in moving from A to B at least one individual is made better off and no one is made worse off. UA Pareto Optimal State B D A C UB Initial Allocation

10. Limitations of the Pareto Criterion • Incomplete ranking of social states • Alternative optima are non-comparable, for example B, C, and D. • Conservative Re-enforcement • Favors the status quo when trade-offs are involved

11. Compensation Criteria • Test whether changes in resource allocation are potential Pareto Improvements. Based on the concept of potential compensation • Hick’s Criterion- maximum WTP of losers greater than minimum WTA of gainers. Property rights lie with gainers • Kaldor’s Criterion- maximum WTP of gainers greater than minimum WTA of losers. Property rights lie with losers • BCA is the empirical implementation of compensation tests • Compensation criteria are efficiency tests that ignore distributional issues

12. Attributes of Compensation Criteria • Compensation tests are tests of economic efficiency gains • More complete ranking than Pareto Criterion. Allows comparison between • Second best social states • First best and second best states • But still incomplete… • Cannot rank different first-best states • Possibilities of logical inconsistency • Intransitive rankings • Possibility of reversal

13. Social Welfare Functions • It is a real-valued function that maps from the welfare of individuals to the welfare of society W=W(UA, UB.....) • Can provide a complete ranking of social outcomes

14. Challenges in SWF analysis • Choice of the social welfare function • Two approaches • Axiomatic Approach- form of function on the basis of axioms about individual preferences (Arrows Impossibility Theorem) • Moral Justice Approach- functional form arrived at on the basis of moral considerations (Which rule?) • Measurement of Individual Welfare

15. What does this mean? • BCA is only one part of the economic welfare assessment • Welfare assessment entails deliberation on economic efficiency - BCA provides information to the effect • When working within the paradigm, information should be combined with conclusions arrived at on the basis of equity principles using other methods

16. Ethical Issues within the Paradigm • To be developed: Issues will include • Appropriate uses • Issues related to the implementation of the technique

17. Ethical Issues about the Paradigm • Outcomes versus decision making processes • Procedural justice- regarding how a decision is made • Citizen participation- regarding whether there is democracy • Rights and Duties • BCA focuses on anthropocentric welfare only • Importance of nature in BCA contingent on nature’s importance to man • BCA figures do not reflect the impact of the project or policy on nature

18. Discussion Issues • When would we be comfortable using BCA? • How much importance should we place on the absent ethical issues? • When can decision making solely depend on BCA? • How to consider catastrophic effects like hurricanes and other natural disasters in BCA?

19. THANK YOU!