Cost-Benefit Analysis and Decision Tools (ESM 245)
Bren School of Environmental Science & Management
University of California, Santa Barbara
Fall 2011
November 11, 2011
Final
Professor: Gary Libecap
Office: 4412 Bren Hall
Phone: 805-893-8611
Email: glibecap@bren.ucsb.edu
Class meetings: Tu & Th 8:30-9:45 1424 Bren Hall
Office hours: Tu 10-11 or by appointment
Course Objectives
Cost-benefit analysis provides a framework for conducting economic analysis of public
policy, as well as tradeoffs in decision making within organizations—firms, NGO, government agencies. The application of cost-benefit analysis to environmental and natural
resource policy is both common and controversial. This is a course in evaluation of
tradeoffs encountered in assessing options for government, NGOs, and private firms.
Cost-benefit analysis and feasibility studies are key tools. We will cover the underlying
theory of social decision-making based on a comparison of economic costs and benefits,
as well as cover more focused application within organizational units. We will consider
numerous applications in the context of environmental and natural resource management,
and have as many presentations of application as possible. We also will read the literature
on key issues in cost-benefit analysis. In many cases, as we will see, cost-benefit analysis
requires an understanding of methods of nonmarket valuation, selection of appropriate
discount rates, addressing uncertainty in the flow of costs and benefits, and issues of their
distribution since they rarely are distributed uniformly in the society. Hence we will
spend time covering the theory of nonmarket values and the methods for estimation in the
context of environmental and natural resources; assessment of discounting options;
weighting of costs and benefits; consideration of uncertainty; and distributional implications. Students will learn the skills necessary to conduct original cost-benefit analyses
and feasibility studies and to evaluate those conducted by others. Additionally, students
will gain an appreciation for the potential advantages and disadvantages of cost-benefit
analysis, along with its relation to other approaches for decision-making about environmental and natural resource concerns.
Course Materials
Required text is Cost Benefit Analysis and the Environment: Recent Developments by
David Pearce, Giles Atkinson, and Susana Mourato, OECD, 2006. It is available on the
web at http://www.oecd-ilibrary.org/content/book/9789264010055-en and UCSB has a
subscription to OECD publications so that students can download chapters. There will be
other cases and readings that will be posted on the web.
1
Course Requirements
You are expected to complete all of the assigned reading before class, as lectures will
build on, rather than reiterate, reading material and there will be discussion of problems
in class led by individual students. The aim is to have much of class based on discussion,
so being prepared will be important. There will be a midterm and final exam, and both
will be given in class. Students will also have multiple problem sets.
Midterm Exam: Thursday, October 27th, in class.
Final Exam Problem: Due Thursday, December 1 by 5 pm.
Course Grades
Course grades will be based on class participation (10%), a midterm exam (25%), and a
final exam (30%), and problem sets (35%).
Tentative Course Outline and Reading List
9/22: What is Cost-Benefit Analysis (CBA) and Why is it Important? Lecture 1
 Review of microeconomic principles for environmental management. Efficiency
criterion and what that means.
 Introduction to CBA. Matt Kotchen, “Cost-Benefit Analysis” Encyclopedia of
Climate and Weather, 2nd Ed, Oxford University Press, 2010.
 Overview of CBA, mimeo.
 Overview of CBA and related measures. Pearce, et al, 2006, Chapters 1, 2
 Introductory CBA Problem: Evaluation of transportation improvement options
for Houston: Buses or Light Rail—Trevor O’Grady
 Homework:
o Problem Set 1: Complete a simple CBA in Excel for Houston’s public
transportation options that were discussed in class. Briefly answer the accompanying discussion questions.
o Due by next class (9/27) via Gauchospace.
 Additional Reading:
o “The Benefits and Costs of a Bus Rapid Transit System in Mexico City”
(2008), mimeo.
9/27: Introduction to Conceptual Issues involving CBA and Transportation Investment
Option Homework. Lecture 2
 Readings:
o Matt Kotchen, “Cost-Benefit Analysis” Encyclopedia of Climate and
Weather, 2nd Ed, Oxford University Press, 2010.
o Pearce, et al, 2006, Chapters 1-3,
 Introduction to discounting, distribution of costs and benefits, impact of shifting
costs to benefits, scale effects, differences in time frame across options.
 Discussion of Problem Set 1.
 Additional readings:
o Mathew Adler and Eric Posner (1999) “Rethinking Cost Benefit Analy2
sis,” Yale Law Journal 109: 165-246.
9/29: Use of Evaluation Tools, such as Cost Benefit Analysis by NGOs: An Environmentalist’s Perspective
 Lee Hannah, Conservation International
 Additional Readings
o US Department of Agriculture (2007) “Imagery for the Nation: Cost
Benefit Analysis” Example of broad public goods project.
10/4 Introduction to Evaluation Tools. Lecture 3
 Readings:
o Pearce, et al, 2006, Chapter 4.
o Skim: Timothy J. Brennan, “Discounting the Future: Economics and Ethics,” Resources 1995.
 Discussion of : Benefit-Cost Ratios, Cost Minimization, Net Present Value Analysis, Internal Rate of Return, Equivalent Annual Net Benefits.
 Homework due October 6:
o Update of Problem Set 1: Evaluate the Houston transportation problem
based on criteria of benefit-cost ratios, net present value, cost minimization, internal rate of return, and equivalent annual net benefits.
o Problem Set 2: Evaluate different discounting options in the discounting
problem.
o Suggested reading: Geoffrey Brennan, “Discounting the Future Yet
Again,” Politics, Philosophy, and Economics 2007.
10/6: Cost Considerations: Concepts and Measurement. Lecture 4
 Readings:
o Pearce et al Chapter 5.
o Skim: Joskow and Schmalensee, 1998, “The Political Economy of Market
Based Environmental Policy: The US Acid Rain Program,” Journal of
Law and Economics 41 (1), 37-83.
o Skim: Harrington, Morgenstern, and Nelson (2000) “On the Accuracy of
Regulatory Cost Estimates,” Journal of Policy Analysis and Management
19 (2): 297-322.
 Discussion of cost issues—direct, indirect costs, distribution of costs.
 Discussion of Update of Problem Set 1 and Problem Set 2.
 Assignment for October 11:
o Review and also be prepared to discuss on October 11, the benefit cost
analysis in the Upper San Joaquin River Basin Storage Formulation.
o The objective of this exercise is to illustrate an example of a real policy
analysis, complexity and issues.
 Readings (Upper San Joaquin River Basin Storage Problem):
o http://www.usbr.gov/mp/sccao/storage/docs/usjrbsi_pfr/index.html: Letter
from Deputy Regional Director, Bureau of Reclamation; Executive Summary; Chapter 8.
o Critique in
3

http://www.sfgate.com/cgi-bin/blogs/gleick/detail?entry_id=46970
o Support in
http://www.valleyvoicenewspaper.com/vv/stories/2009/vv_temperanceflat
_0164.htm
o And in
http://www.reedleyexponent.com/articles/2011/02/11/news/doc4d532eaa8
85b2886109340.txt
o First entry in http://parkwayblog.blogspot.com/2006_05_01_archive.html
Additional Readings
o Eisen-Hecht and Kramer (2007) “A Cost Benefit Analysis of Water Quality Protection in the Catawba Basin” Journal of the American Water Resource Association 38(2): 453-65. .
10/11: Introduction to Benefit Valuation: Revealed Preference and Examination of
the Upper San Joaquin River Basin Storage Formulation case . Lecture 5
 Readings,
o Pearce et al Chapter 6, 11.
o Skim: Loomis, et, al, 1998, “Paired Comparison Estimates of Willingness
to Accept versus Contingent Valuation Estimates of Willingness to Pay,”
Journal of Economic Behavior and Organization 35 (4): 501-515
 Total Economic Value—use and non use (existence) valuation concepts.
 Introduction to Revealed Preference techniques.
 Discussion of the Temperance Flat Reservoir Project. Problem 3 assignment.
Due November 3. Design a CV approach for valuing the flowing stream that will
be flooded as part of the Temperance Flat Reservoir proposal, associated lost trout
fishing, boating, and the lost spawning habitat. Describe how you would survey—population size, method; provide a sample list of questions; discuss how
you would interpret the results; indicate potential problems you might encounter;
and reference any literature you have used. 5 pages maximum. Bring a ppt to
class to be ready to present your approach. Read the materials on Temperance
Dam. Work day, October 27—no class.
10/13: Benefit Cost Analysis for California Flood Management
 Presentation and discussion of a real, ongoing policy evaluation.
 Matt Young, MESM 2010, Policy Analysis, MWH Global
 Reading: Skim Central Valley Flood Protection Plan, Progress Report.
10/18: Introduction to Benefit Valuation: Revealed Preference Continued. Lecture 6
 Reading,
o Pearce et al Chapter 7
o Skim: Schmidt and Courant (2006) “Sometimes Close is Good Enough:
The Value of Nearby Environmental Amenities,” Journal of Regional Science.
o Skim: Abdalla et al (1992) “Valuing Environmental Quality Changes Using Averting Expenditures: An Application to Ground Water Contamination,” Land Economics
4






Various means of determining value from revealed preference.
Hedonic Prices—property valuation,
Travel Cost Estimates
Averting Behavior
Benefits of avoiding cost of illness and lost output (morbidity and mortality issues
and the statistical value of life are addressed in more detail later in the course).
Hedonic Pricing Example. Trevor O’Grady,
10/20: Introduction to Benefit Valuation: Stated Preference--Contingent Valuation.
Lecture 7
 Stated Preference: Introduction to Contingent Valuation and Existence Value.
 Class discussion of the readings for insights in to CV analysis and existence values and the problems and controversies involved. Class discussion will revolve
around the approaches used in each of the studies below.
 Readings:
o Pearce, et al, Chapter 8.
o Skim: Kotchen and Burger (2007) “Should we Drill in the Arctic National
Wildlife Refuge? An Economic Perspective,” Energy Policy
o Skim: John Loomis and Douglas Larson (1994), “Total Economic Values
of Increasing Gray Whale Populations: Results from a Contingent Valuation survey of Visitors and Households,” Marine Resource Economics 9:
275-86.
o Skim: Loureiro, Loomis, Vazquez (2009), “Economic Valuation of Environmental Damages due to the Prestige Oil Spill in Spain,” Environmental
and Resource Economics 44: 537-53.
o Skim: Richard T. Carson, et al (2003), “Contingent Valuation and Lost
Passive Use : Damages from the Exxon Valdez Oil Spill,” Environmental
and Resource Economics 25: 257-86.
o Skim: Nelson (1996) “How Much is God Worth? The Problem—
Economic and Theological of Existence Value,” working paper, Competitive Enterprise Institute.
10/25: Introduction to Benefit Valuation: Stated Preference--Contingent Valuation.
Lecture 7 continued.
 Continued discussion of readings from 10/20.
o Pearce, et al, Chapter 8.
o Skim: Kotchen and Burger (2007) “Should we Drill in the Arctic National
Wildlife Refuge? An Economic Perspective,” Energy Policy
o Skim: John Loomis and Douglas Larson (1994), “Total Economic Values
of Increasing Gray Whale Populations: Results from a Contingent Valuation survey of Visitors and Households,” Marine Resource Economics 9:
275-86.
o Skim: Loureiro, Loomis, Vazquez (2009), “Economic Valuation of Environmental Damages due to the Prestige Oil Spill in Spain,” Environmental
and Resource Economics 44: 537-53.
o Skim: Richard T. Carson, et al (2003), “Contingent Valuation and Lost
5


Passive Use : Damages from the Exxon Valdez Oil Spill,” Environmental
and Resource Economics 25: 257-86.
o Skim: Nelson (1996) “How Much is God Worth? The Problem—
Economic and Theological of Existence Value,” working paper, Competitive Enterprise Institute.
ADDITIONALLY
o Skim: Matt Kotchen, Kevin Boyle and Anthony Leiserowitz, “PolicyInstriument Choice and Benefit Estimates for Climate-Change Policy in
the United States,” working paper, Yale University, October 2011.
o Skim: Arrow et al. (1996) “Is There a Role for Benefit-Cost Analysis In
Environmental, Health, and Safety Regulation,” Science, 272, 221-222.
o Skim: Paul Portney (1994) “The Contingent Valuation Debate: Why
Economists Should Care,” Journal of Economic Perspectives 8(4): 3-17.
CV Example: Trevor O’Grady
10/27: NO CLASS—work on problem set 3 due Nov 3.
11/1 Introduction to Benefit Valuation Continued; Contingent Valuation Lecture 8
 Continued class discussion of CV analysis and policy options and outcomes based
on it.
o Pearce et al Chapter 8
o Skim: Rubin et al. (1991) “A Benefit-Cost Analysis of the Northern Spotted Owl,” Journal of Forestry December 25-30.
o Skim: Kotchen and Reiling (2000) “Environmental Attitudes, Motivations, and Contingent Valuation of Nonuse Values: A Case Study Involving
Endangered Species,” Ecological Economics32: 93-107.
o Skim: Lueck and Michal (2003) “Pre emptive Habitat Destruction under
ESA” Journal of Law and Economics 46: 27-60.
11/3 Value Measurement Issues and Discounting of Long Term Environmental Effects: GHG Mitigation Lecture 9.
 Class discussion of discounting issues and the benefits measurement homework.
 Readings,
o Pearce et al Chapter 13.
o Skim: Stern Review, Executive Summary.
o Skim: Nordhaus (2007) Science “Critical Assumptions in the Stern Review on Climate Change.”
o Skim: Nordhaus (2007) “A Review of the Stern Review on the Economics of Climate Change” Journal of Economic Literature 45(3): 686-702.
o Skim: Weitzman (2007) “A Review of the Stern Review on the Economics of Climate Change” Journal of Economic Literature 45(3): 703-24.
 Debate over discounting and benefit/cost estimation regarding GHG mitigation.
 Additional reading:
Sunstein and Rowell (2007) “ On Discounting Regulatory Benefits: Risk, Money,
and Intergenerational Equity” The University of Chicago Law Review 74:171-208
6

Discuss Problem Set 3. Students will be asked to describe their CV approach
with ppt.
11/8; Valuing Eco System Services Lecture 10.
 Pearce, et al. Chapter 12.
 Other readings
o Skim: Sanders, Walsh, Loomis (1990) “Toward Empirical Estimation of
the Total Value of Protecting Rivers,” Water Resources Research 26(7):
1345-57.
o Skim: Douglas and Taylor (1999) “The Economic Value of Trinity River
Water,” Water Resource Development 15(3): 309-22.
o Murtough, Aretino and Matysek, (2002), “Creating Markets for Ecosystem
Services,” Canberra: Productivity Commission, Staff Research Paper.
 Review discussion
11/10 In class midterm exam.
 Exam covers material covered in readings and discussion through November 8.
11/15: Sustainability and Cost-Benefit Analysis Lecture 11
 Readings:
o Pearce et al, Chapter 16
o Notes on Catastrophe, tipping points, fat tails.
o Skim:--carefully- Arrow, K., Dasgupta, P; Goulder, L; Daily, G; Ehrlich,
P; Heal, G.; Levin, S; Mäler, KG; Schneider, S; Starrett. D; and Walker, B.
(2004) Are We Consuming Too Much? Journal of Economic Perspectives,18 (3): 147-172.
o Skim--carefully: Catastrophic risk, Richard Posner (2006), “Efficient Responses to Catastrophic Risk,” University of Chicago Journal of International Law.
o Nathaniel Koehane and Sheila Olmstead, Markets and the Environment ,
2007, Washington: Island Press, Chapter 11 “Sustainability and Economic
Growth, 207-229.
11/17: Case Study of Cost Benefit Analysis for a Sustainability Strategy at CalTech
 John Onderdonk, Manager for Sustainability Programs, California Institute of
Technology
11/22: Valuing Health and Life Risks Lecture 12
 Readings:
o Pearce et al, Chapter 14
o Skim: Sunstein (2003) “Lives, Life-Years and Willingness to Pay,” working paper, American Enterprise Institute.
o Skim: Powell (1997) “The 1991 Lead/Copper Drinking Water Rule and
1995 Decision not to Revise the Arsenic Drinking Water Rule; Two Case
Studies in EPA’s Use of Science,” RFF working paper.
o Skim: EPA (1985) “Costs and Benefits of Reducing Lead in Gasoline: Fi7




nal Regulatory Impact Analysis.”
o Skim: Gould (2009) “Childhood Lead Poisoning” CBA analysis of returns
to reducing lead hazards in paint.
o Skim Viscusi (2008) “Value of Life” New Palgrave Dictionary of Economics Online, 2nd Ed.
Morbidity and Mortality
Debate over Value of Statistical Life (VSL)
Class evaluation
Final Exam assignment:
o Summarize and critique any CBA ex ante and ex post for either the
introduction of the wolf in the Northern Rockies or the adoption of
U.S. Ethanol Policies. Discuss cost/benefit estimates and projections,
distribution, discounting, other factors that could impact the BC ratio.
If you do not find such studies, then discuss the benefits, costs, and related projections that you locate that would be necessary for CBA
analysis and project what you might find. Due as your final via Gauchospace (12/1, 5pm). 10 pages maximum.
11/24 Thanksgiving Holiday—no class.
11/29 Evaluation of Methods of Reducing Fuel Consumption by Automobiles
 Ryan McMullan, MESM 2005, Environmental, HazMat & Safety Programs
Administration, Legal and Corporate ResponsibilityToyota Motor Sales
 Assignment of Final Problem due 12/1 5 pm, via Gauchospace.
12/1: Final. Due 5 pm.
8