Chapter 11 Cost benefit analysis
11.1 Intertemporal welfare economics
11.2 Project appraisal
11.3 Cost-benefit analysis and the environment
Learning objectives
learn about the conditions necessary for intertemporal
efficiency
§
revisit the analysis of optimal growth introduced in
Chapter 3
§
find out how to do project appraisal
§
learn about cost–benefit analysis and its application
to the environment
§
be introduced to some alternatives to cost–benefit
analysis
Cost-benefit analysis
Cost-benefit analysis, CBA, is the social appraisal of marginal
investment projects, and policies, which have consequences over time
It uses criteria derived from welfare economics, rather than commercial
criteria.
CBA seeks to correct project appraisal for market failure
Environmental impacts of projects/policies are frequently externalities,
both negative and positive
CBA seeks to attach monetary values to external effects so that they can be
taken account of along with the effects on ordinary inputs and outputs to
the project/policy
CBA is the same as BCA – Benefit-cost analysis.
Intertemporal efficiency
Given that CBA is concerned with consequences over time, and based in welfare
economics, a key idea is that of intertemporal efficiency.
U  U (C , C )
A
A
A
A
0
1
U  U (C , C )
B
B
B
B
0
1
(11.1)
An allocation is efficient if it is impossible to make one individual better off
without thereby making the other worse off.
Intertemporal efficiency requires the satisfaction of 3 conditions
Equality of individuals’ consumption discount rates
Equality of rates of return to investment across firms
Equality of the common consumption discount rate with the common
rate of return
Discount rate equality
MRUS
r
A
C 0,c1
=
A
C0, C1
otherwise one could be made better off without making the other
worse off
B
MRUS C 0,c1
≡
MRUS
A
C0, C1
1
defines A’s consumption discount rate
Then the first intertemporal efficiency condition is stated as
rA=rB = r
(11.2)
Note: consumption discount rates are not constants.
Shifting consumption over time
Foregoing Cb0Ca0 makes Ca1Cb1 available next
period. The rate of return to, on,investment is
defined as
 
C1  I 0
I 0
where ΔC1 is the second period
increase in consumption, Ca1Cb1,
resulting from the first period
increase in investment ΔI0, Cb0Ca0.
For ΔI0 = ΔC0, this is
δ
ΔC  (ΔC ) ΔC  ΔC
ΔC


1
 ΔC
 ΔC
ΔC
1
0
0
1
0
0
1
0
which is the negative of the slope of the transformation frontier minus 1, which can
be written
1    s
where s is the slope of the frontier.
Rate of return equality
If each firm were investing as indicated by C01b and C02b, then period 1
consumption could be increased, without loss of period 0 consumption, by
having firm 1, where the rate of return is higher, increase investment by the
amount firm 2, where the rate of return is lower, reduced its investment.
Only where rates of return are equal is this kind of period 1 gain impossible.
For N firms, the second intertemporal efficiency condition is
 i   , i  1,..., N
(11.3)
Equality of discount rate and rate of return
If the first two conditions are satisfied, can consider representative individual and firm.
Point a corresponds to intertemporal efficiency, b and c do not as from either could reallocate
consumption as between periods so as to move on to a higher consumption indifference
curve.
At a the slopes of the consumption indifference curve and the consumption ttansformation
frontier are equal. The third condition is
 r
(11.4)
Intertemporal optimality
As in the single period situation, the intertemporal efficiency
conditions do not fix a unique intertemporal allocation.
That requires a social welfare function with utilities as arguments
Will consider this under ‘Optimal growth models’
Markets and intertemporal efficiency –futures markets
Futures Markets
X at t is treated as a different commodity from X and t+1
For N commodities and M periods there are MN dated commodities. Contracts are
written at the start of the first period for trades an all commodities at all future dates.
Then, it is effectively the static case.
Given that all ideal circumstances apply in all MN markets, the conditions for
intertemporal efficiency will be satisfied.
Futures markets are, in fact, rare – standardised raw materials,
financial instruments.
Markets and intertemporal efficiency – loanable funds market
Loanable Funds Market
xP
i
P
b
b
x is the bond coupon paid on the first day of period 1
Pb is the price the bond trades for on the first day of period 0
i is the interest rate
A seller is a borrower
A buyer is a lender
Individuals - utility maximisation
UU is a consumption indifference curve, slope –(1+r)
Line C1max C0max is the budget constraint, slope –(1+i)
Optimum is at C*0 in period 0 and C*1 in period 1, where
r=i
which will hold for all individuals, satisfying the first
intertemporal efficency condition
Firms – present value maximisation
Owners of firms can shift consumption by
investing in firm
dealing in the bond market
AB shows C0 C1 combinations on account of
varying investment, slope –(1+ δ), δ is the
rate of return to investment
RS with slope -(1+i) shows how
consumption can be shifted via bond market
dealing.
The optimum level of investment is at a, where the present value of the firm is
maximised, and where
i=δ
In the second stage the owner maximises utility, by bond market dealing, at b where
i=r
All owners so act, and the three conditions for intertemporal efficiency are satisfied.
Optimal growth modelling; discrete time
A representative individual model for two periods
Maximise
 1 
W  U  C0   
U  C1 
 1  
(11.5a)
subject to
Q0(K0) – (K1 – K0) = C0
(11.5b)
Q1(K1) – (K2 – K1) = C1
(11.5c)
Here the efficiency problem is trivial – consumption in one period can only be
increased by reducing it in the other period.
A necessary condition is
U C1
1 

UC 0
1 
(11.6)
So with diminishing marginal utility, C1 is greater than C0 for
ρ, the utility discount rate, less then δ, the rate of return on
investment. For ρ = δ consumption is constant.
Optimal growth modelling: continuous time
Maximise
W   U(C )e dt
t 
t 0
 ρt
(11.7a)
t
Subject to
.
K = Q(Kt) - Ct
(11.7b)
has necessary condition
.
UC
  
UC
(11.8)
where ρ is a parameter, the utility discount rate, and δ is a variable,
the rate of return to capital accumulation. For δ > ρ, given
diminishing marginal utility, C is growing. Consumption growth
ceases when δ = ρ.
Optimal growth in the basic model
A model with resource input to production
Maxximise
W   U(C )e dt
t 
t 0
 ρt
(11.9a)
t
Subject to
K  Q  Kt , Rt   Ct
.
(11.9b)
.
S   Rt
(11.9c)
In this model intertemporal efficiency is not trivial.
There are two forms of investment, in capital and in the resource stock.
Efficiency requires that the rates of return on the two are equal.
See chapter 14 especially
Utility and consumption discount rates 1
Figure 11.8 Indifference curves in utility and consumption space
 1
W  U  C0   
 1 

 U  C1 

UC 0

1/ 1    
 U C1
intertemporal welfare function for panel a
slope of WCWC in panel b
1   U C 0

UC 0
r
1 
1
U C1
1/ 1    U C1
(11.10)
Utility and consumption discount rates 2
In continuous time
r    g
(11.11)
where
r is the consumption discount rate
ρ is the utility discount rate
η is is the elasticity of marginal utility for
the instantaneous utility function
g is the growth rate
For g>0 r> ρ and r would be positive for ρ = 0
For g = 0 r = ρ
Private project appraisal – the Net Present Value test 1
The present value of expenditures E is
E1
E2
ET

 ... 
2
T
1  i 1  i 
1  i 
PVE  E0 
T

0
Et
1  i 
(11.14)
t
The present value of receipts R is
PVR  R0 
T

0
R1
R2
RT

 ... 
2
T
1  i 1  i 
1  i 
Rt
1  i 
(11.15)
t
The present value of the project is
T
NPV  PVR  PVE  
0
T
RT
1  i 
t

0
Et
1  i 
t
(11.16)
Which for N = R - E is
NPV  N 0 
T

0
N1
N2
NT

 ... 
2
T
1  i 1  i 
1  i 
Nt
1  i 
t
The project should go ahead iff NPV≥0
(11.17)
Private project appraisal – the Net Present Value test 2
Year
Expenditure
Receipts
Net cash flow
0
100
0
–100
1
10
50
40
2
10
50
40
3
10
45.005
35.005
4
0
0
0
Table 11.2 Example net cash flow 1
at i = 0.05, NPV = £4.6151
at i = 0.075, NPV = £0
at i = 0.10, NPV = -£4.27874
The NPV of a project is the amount by which it increases the
firm’s net worth. It is the present value of the surplus, after
financing the project, at the end of the project lifetime.
Private project appraisal - risk
Year
Net cash flow 1
Probability 0.6
Net cash flow 2
Probability 0.4
Year
Expected net cash
flow
Present value of
expected cash flow
0
–100
–100
0
–(0.6 x 100) + {–(0.4 x
100)} = –100
–100
1
40
35
1
(0.6 x 40) + (0.4 x 35) =
38
38/1.075 = 35.35
2
40
35
(0.6 x 40) + (0.4 x 35) =
38
38/1.0752 = 32.88
2
3
(0.6 x 35.005) + (0.4 x
25) = 31.003
31.003/1.0753 = 24.96
4
(0.6 x 0) + (0.4 x 0) = 0
3
4
35.005
0
25
0
Expected
NPV
Table 11.4 One project, two possible cash flows
–6.81
Table 11.5 Calculation of expected NPV
Where the firm is prepared to assign probabilities, the criterion for going ahead with the project is
the expected NPV – the probability weighted sum of the mutually exclusive cash flow outcomes.
This assumes that the decision maker is risk-neutral
Chapter 13 on decision making in the face of imperfect knowledge of the future.
Social project appraisal
CBA is the social appraisal of projects
CBA uses the NPV test
CBA can be approached in two ways
As an extension of private appraisal where externalities are taken into
account
In terms of social welfare enhancement
The first stages of CBA are
proper project/policy identification
forecasting all of the consequences of the project/policy for all of the
affected individuals in each year of the project/policy lifetime
Then
expressing consequences in terms of monetary gains/losses for
aggregation to an NPV number
Social appraisal: an illustrative project
Time period
Individual
0
1
2
3
Overall
A
NBA,0
NBA,1
NBA,2
NBA,3
NBA
B
NBB,0
NBB,1
NBB,2
NBB,3
NBBB
C
NBC,0
NBC,1
NBC,2
NBC,3
NBC
Society
NB0
NB1
NB2
NB3
Table 11.6 Net benefit (NB) impacts consequent upon an illustrative project
NPV  NB0 
NB3
NB1
NB2


1  r 1+r 2 1+r 3
Generally, go ahead if
t T
NPV  
t 0
NBt
0
(1  r) t
(11.19)
CBA as a potential pareto improvement test
A positive NPV indicates that, with due allowance for the dating of costs and benefits, the project delivers a
surplus of benefit over cost. The consumption gains involved are greater than the consumption losses, taking
account of the timing of gains and losses. The existence of a surplus means that those who gain from the
project could compensate those who lose and still be better off.
Finance by taxation – two periods
The initial investment is ΔI0, equal to -ΔC0, and the consumption increment on account of going ahead with
the project is ΔC1. First period consumers lose an amount ΔC0, equal to ΔI0, and second period consumers
gain ΔC1, and the question is whether the gain exceeds the loss. From the viewpoint of the first period, the
second period gain is worth ΔC1/(1+r), so the question is whether
ΔC1/(1+r) > ΔI0
(11.20)
is true, which is the NPV test discounting at r.
Finance by borrowing – two periods
The government funds the project by borrowing and the project displaces the marginal private sector project
with rate of return δ. In this case the cost of the public sector project is ΔI0 in the first period plus δΔI0 in the
second, this being the extra consumption that the private sector project would have generated in the second
period. In this case, from the viewpoint of the first period, the gain exceeds the loss if:
ΔC
δΔI
(11.21)
 ΔI 
1 r
1 r
This is the NPV test with the consumption gain discounted at the consumption rate of interest, and compared
with the cost of the project scaled up to take account of the consumption that is lost on account of the
displaced private sector project.
1
0
0
CBA as welfare increase test 1
Time period
Individual
0
1
2
3
Overall
A
ΔUA,0
ΔUA,1
ΔUA,2
ΔUA,3
ΔUA
B
ΔUB,0
ΔUB,1
ΔUB,2
ΔUB,3
ΔUB
C
ΔUC,0
ΔUC,1
ΔUC,2
ΔUC,3
ΔUC
Society
ΔU0
ΔU1
ΔU2
ΔU3
Table 11.7 Changes in utility (∆U) consequent on an illustrative project
W = W(UA,0,..., UC,3) positive – the project should go ahead
Or
with an intratemporal social welfare function mapping individual utilities into a social
aggregate Ut
W = W(U0, U1, U2, U3) positive – the project should go ahead
where a widely entertained particular form is
ΔW  ΔU 
0
ΔU
ΔU
ΔU


1  ρ (1  ρ)
(1  ρ)
1
2
is exponential discounting
3
2
3
CBA as welfare increase test 2
Utility variations consequent on going ahead with the project cannot be estimated.
But, using the methods of chapter 12, monetary equivalent gains and losses can be
estimated.
Time period
Individual
0
1
2
3
Overall
A
NBA,0
NBA,1
NBA,2
NBA,3
NBA
B
NBB,0
NBB,1
NBB,2
NBB,3
NBBB
C
NBC,0
NBC,1
NBC,2
NBC,3
NBC
Society
NB0
NB1
NB2
NB3
 1 
W   
 UC
1

ρ


t
T
t 0
t

implies
 1 
W  
C
1  r 
where
t
T
t 0
r
(1  ρ)U
U
Ct
Ct 1
1
t
(11.22)
or
or r = ρ + ηg
(11.23)
CBA as welfare increase test 3
The NPV test is interpreted as a test that identifies projects that yield welfare improvements positive and negative consumption changes, net benefits that is, are added over time after
discounting, so that
 1 
W   
 C
1

r


t
T
t 0
(11.24)
t
and for ΔW > 0 the project is welfare enhancing and should go ahead
Finance by taxation two periods
 1 
ΔW  ΔI  
ΔC
1

r


0
(11.25)
1
where the rhs is NPV, positive for ΔC1/(1+r) > ΔI0
Finance by borrowing, two periods
If the project crowds out the marginal private sector project
 ΔC δΔI 
(11.26)
ΔW  ΔI  


1  r 1  r 
where the rhs is NPV, positive if
1
0
0
ΔC
δΔI
 ΔI 
1 r
1 r
1
0
0
Choice of discount rate 1
There is disagreement about the discount rate that should be used in CBA
This matters because the result of the NPV test can be very sensitive to the number
used for the discount rate.
This is especially true where the project lifetime is long, as it often is with projects
with environmental consequences – the lifetime is when the longest lasting
consequence ceases, not when the project stops yielding the benefits which were its
purpose – nuclear electricity generation and waste products.
Time Horizon
Table 11.8 Present values at various
discount rates
Years
Discount rate %
25
50
100
200
0.5
88.28
77.93
60.73
36.88
2
60.95
37.15
13.80
1.91
3.5
42.32
17.91
3.21
1.03
7
18.43
3.40
0.12
0.0001
For £100 at futurity shown
Choice of discount rate 2
With no market failure r = i = δ
Given market failure which to use?
Generally agreed that whichever way looking at CBA – potential pareto improvement
or welfare enhancing – should use r, the consumption discount rate.
Shadow pricing
While it is agreed that r should be used to discount, δ appears in the NPV criterion as
ΔC
δΔI
(11.21) and ΔW  ΔI   ΔC  δΔI 
 ΔI 
(11.26)
1 r
1 r
1  r 1  r 
1
0
0
1
0
0
which apply with finance by borrowing when there is crowding out – δ is there to
adjust the initial cost, shadow price it, for the displacement of the marginal private
sector project.
At one time it was thought that, on account of crowding out, proper shadow pricing
of all inputs and outputs was important in CBA. And difficult.
Now the dominant view is that given international capital mobility, crowding out is
not a problem – that the supply of capita for private sector projects could be treated
as perfectly elastic.
Shadow pricing is not now seen as necessary in CBA
Choice of discount rate 3 – descriptive versus prescriptive
Regarding CBA as about potential pareto improvement aligns with the descriptive approach
to determining a number for r – it should be the post tax return on risk free lending reflecting
the rate at which people are willing to exchange current for future consumption.
Those who regard CBA as a test for welfare enhancement tend to adopt the prescriptive
approach to a number for r, according to
r = ρ + ηg
(11.23)
where
ρ is the utility discount rate
η is the elasticity of the marginal utility of consumption
g is the growth rate
Some economists want to get values for ρ and η from observed behaviour, some from
ethical considerations.
Much of the controversy among economists over the Stern Review of the climate change
problem focussed on the numbers used in (11.23) – Stern took an ethical prescriptive
position
Box 11.2 Discount rate choices in practice
US Office of Management and Budget
7% as an estimate of pre-tax return on capital
US Environmental Protection Agency
For intragenerational – descriptive, r as 2-3%
For intergenerational - r = ρ + ηg with ρ = 0 on ethical grounds, gives r 0.5% to 3%
HM Treasury UK
‘Green Book’ instructions based on r = ρ + ηg – ‘evidence’ suggests ρ = 1.5%, η = 1 and g = 2%
giving r = 3.5%.
For lifetimes greater than 30 years
Years ahead
31-75
76-125
126-200
201-300
301+
Discount rate
3.0%
2.5%
2.0%
1.5%
1.0%
because of ‘uncertainty about the future’
The Stern Review
Implicit r of 2.1% from r = ρ + ηg with ρ = 0.1%, η = 1, and g = 2%.
Environmental cost-benefit analysis
Look at wilderness area development.
With Bd for development benefits and Cd for development costs, and ignoring
environmental impact
t T
NPV  
t 0
Bt  Ct
1  r 
t
T

0
T
Bt
1  r 
t

0
Ct
1  r 
t
 Bd  Cd
Denote this as NPV’. Then the proper NPV taking account of environmental impacts is
NPV = Bd – Cd – EC = NPV’ – EC
(11.27)
where EC is the present value of the stream of the net value of the project’s
environmental impacts over the lifetime of the project.
EC stands for Environmental Cost
From (11.27) the project should go ahead if
NPV’ = Bd – Cd > EC
(11.28)
Inverse ECBA
A wilderness development project should not go ahead if
EC ≥ NPV’ = Bd – Cd
so that
EC* = NPV’ = Bd – Cd
(11.29)
defines a threshold value for EC. For EC ≥ EC* the project should not go ahead.
The exercises ( Chapter 12 ) that seek to ascertain EC are typically expensive, and
sometimes controversial. Consideration of EC* can put their results in perspective.
As can consideration of EC*/N, where N is the size of the relevant affected
population, which is not necessarily restricted to visitors, and may include people
from a wider area than the host country, as with an internationally recognised
wilderness/ conservation area inscribed as ‘world heritage’.
Box 11.3 Mining at Coronation Hill?
In 1990 there emerged a proposal to develop a mine at Coronation Hill in the Kakadu national park,
which is listed as a World Heritage Area. The Australian federal government referred the matter to
the Resource Assessment Commission, which undertook a very thorough exercise in environmental
valuation using the Contingent valuation Method, implemented via a survey of a sample of the
whole Australian population. This exercise produced a range of estimates for the median
willingness to pay, WTP, to preserve Coronation Hill from the proposed development, the smallest
of which was $53 per year. If it is assumed, conservatively, that the $53 figure is WTP per
household, and this annual environmental damage cost is converted to a present value capital sum
in the same way as the commercial NPV for the mine was calculated, the EC to be compared with
the mine NPV' is, in round numbers, $1500 million. This 'back of the envelope' calculation assumes
4 million Australian households, and a discount rate of 7.5%.
It was pointed out that given the small size of the actual area directly affected, the implied per
hectare value of Coronation Hill greatly exceeded real estate prices in Manhattan, whereas it was
'clapped out buffalo country' of little recreational or biological value. In fact, leaving aside
environmental considerations and proceeding on a purely commercial basis gave the NPV' for the
mine as $80 million, so that the threshold per Australian household WTP required to reject the
mining project was, in round numbers, $3 per year, less than one-tenth of the low end of the range
of estimated household WTP on the part of Australians. Given that Kakadu is internationally famous
for its geological formations, biodiversity and indigenous culture, a case could be made for
extending the existence value relevant population, at least, to North America and Europe.
In the event, the Australian federal government did not allow the mining project to go ahead. It is
not clear that the CVM application actually played any part in that decision.
The Krutilla-Fisher model 1
NPV is the result of discounting and summing over the project’s lifetime an annual net benefit stream
which is
NBt = Bd,t – Cd,t – ECt
(11.30)
where Bd,t, Cd,t and ECt are the annual, undiscounted, amounts for t = 1, 2,..., T, and where T is the project
lifetime, corresponding to the present values Bd, Cd and EC. The environmental costs of going ahead with the
project, the ECt, are at the same time the environmental benefits of not proceeding with it. Instead of EC t we
could write B(P)t for the stream of environmental benefits of preservation.4 If we also use B(D)t and C(D)t for
the benefit and cost streams associated with development when environmental impacts are ignored, so that
B(D)t – C(D)t is what gets discounted to give NPV, then equation 11.30 can also be written as:
NBt = B(D)t – C(D)t – B(P)t
(11.31)
Switching to continuous time, instead of
T
NPV   {B  D t  C  D t  B  P t }/ 1  r 
t
0
we use
NPV   {B  D t  C  D t  B  P t }ert dt
T
0
which can be written as
NPV   {B  D t  C  D t }ert dt   B  P t ert dt
T
T
0
0
(11.32)
The Krutilla-Fisher model 2
Krutilla-Fisher (1975) argued that value of wilderness services relative to those of
development outputs will increase over time due to
substitution possibilities wrt development output
technical progress in development activities
income elasticity of demand for wilderness services, fixed in supply
Assume preservation benefits grow at rate a T
T
0
0
NPV   {B  C}e rt dt   {Peat }e rt dt
(11.33)
which with B and C for constant flows of development benefits and costs, and Peat as the growing
flow of preservation benefits, can be written
NPV  NPV   Pe r at dt
T
(11.34)
0
For given NPV’, a>0 reduces NPV – a development is less likely to pass the NPV test
if the Krutilla-Fisher arguments hold
For a = r means preservation benefits effectively not discounted
a>r means effective negative discounting on preservation benefits
The Krutilla-Fisher model 3
Let T  for two reasons
For a constant flow of x, the present value is x/r
For wilderness impacting projects, T will generally be very large
For T , (11.34) becomes
NPV = NPV’ – P/(r-a)
(11.35)
Table 11.9 P/(r-a) for P =1
a
For r = 0.05
For r = 0.075
0
20
13.33
0.01
25
15.37
0.02
33.33
18.18
0.03
50
22.22
0.04
100
28.57
0.05

40
0.06
66.67
0.075

Discount rate adjustment?
Working with a lower discount rate does not always favour preservation.
T
T
NPV  {B  C} e dt  P  e
 rt
0
 (r  a)t
dt
0
With D for net development benefits
T
T
NPV  D  e dt  P  e
 rt
0
 (r  a)t
dt
0
For large T this is approximated by
NPV=
D
P

r ra
(11.36)
With X for start-up costs
NPV   X 
D
P

r r a
(11.37)
X = 1000, D = 75, P = 12.5.
For a = 0. r = 0.055 gives NPV = 136.37, r = 0.045 gives NPV = 388.89 –
lowering the discount rate increases NPV
For a = 0.025. r = 0.055 gives NPV = -53.03, r = 0.045 gives NPV = 41.66 –
lowering the discount rate makes the project viable.
Objections to environmental cost-benefit analysis
ECBA is based in welfare economics which is consequentialist and subjectivist.
Essentially it accepts that the natural environment should be subject to
consumer sovereignty
Two main classes of objection at the level of principle.
1. Accept that only human interests count, but reject consumer sovereignty as
proper guide to those interests on the grounds of
inadequate information about consequences
insufficiently deliberative
lacking self-knowledge
preference shaping
2. The interests of other living entities should be taken into account
Some question the ECBA agenda at the level of practice – can Chapter 12
methods actually deliver the necessary information?
Limits to applicability of ECBA -sustainability and
environmental valuation
There is no guarantee that the subjective assessment of their utility losses by
individuals will be large enough to stop a project that threatens resilience, and
thus sustainability.
Implicit in ECBA is the assumption of ‘weak’ sustainability, which ignores
critical natural capital and non-substitutabilities as between reproducible and
natural capital.
ECBA should be restricted in its application
Alternatives to environmental cost-benefit analysis
Two stage processes
Assessment of consequences – Environmental Impact Assessment, Impact
Assessment, Social Impact Assessment. ( Assessment = estimation )
This can be left to ‘experts’
Evaluation of consequences
Not to be left to experts
Multi-criteria analysis
Deliberative polling
Citizens’ juries
An illustrative transport problem
The results of the impact assessment are
Table 11.10 Options for reducing traffic delays
A. Highway
B. Highway and Buses
C. Railway
250
300
500
Time Saving 106 hours per year
10000
8000
6000
CO2 Emissions 103 tonnes per year
1000
800
200
Wildlife and Amenity Qualitative
Bad
Bad
Moderate
Cost 106£
Cost effectiveness analysis gives priority to one aspect of performance - select
the option that achieves specified objective at least cost. For minimum acceptable
time saving 8000 million hours per year, A over achieves and costs less than B.
MCA - weighted sums 1
There are several forms of MCA according to how evaluations on different criteria are
combined to choose an option – weighted sums is the simplest.
A. Highway
Cost
106£
Time Saving
106
CO2 Emissions
hours per year
103
tonnes per year
Wildlife and Amenity Qualitative
B. Highway and Buses
C. Railway
250
300
500
10000
8000
6000
1000
800
200
Bad
Bad
Moderate
Bad
Moderate
Slight
3
2
1
A. Highway
Cost 106£
Time Saving 106 hours per year
CO2 Emissions 103 tonnes per year
Wildlife and Amenity Qualitative
B. Highway and Buses
C. Railway
250
300
500
10000
8000
6000
1000
800
200
3
3
2
MCA – weighted sums 2
Convert the data to dimensionless form, so as to permit aggregation. This is done by
expressing the criterion outcome for each option as a ratio to the best outcome for the criterion
which is set equal to 1. Gives the dimensionless evaluation table:
Highway
Cost
1.0000
Highway and
Buses
0.8333
Railway
Time Saving
1.0000
0.8000
0.6000
CO2 Emissions
0.2000
0.2500
1.0000
Wildlife and Amenity
0.6667
0.6667
1.0000
0.5000
For weights
Costs
0.3
Time Saving
0.3
CO2 Emissions
0.2
Wildlife and Amenity
0.2
multiplying dimensionless evaluation table and summing gives
Highway
Highway and
Buses
Railway
Cost
0.3000
0.2500
0.1500
This ranks options
Time Saving
0.3000
0.2400
0.1800
1. Highway
CO2 Emissions
0.0400
0.0500
0.2000
Wildlife and Amenity
0.1333
0.1333
0.2000
Sum
0.7733
0.6733
0.7300
2. Railway
3. Highway and buses
MCA – weighted sums 3
For weights
Costs
0.2
Time Saving
0.2
CO2 Emissions
0.4
Wildlife and Amenity
0.2
get
Highway
Highway and
Buses
Railway
Cost
0.2000
0.1667
0.1000
Time Saving
0.2000
0.1600
0.1200
CO2 Emissions
0.0800
0.1000
0.4000
Wildlife and Amenity
0.1333
0.1333
0.2000
Sum
0.6133
0.5600
0.8200
and the ranking is
1. Railway
2. Highway
3. Highway and buses
Deliberative polling
1. Run an opinion poll
2. Get respondents to a meeting to collectively consider the issues by hearing and
questioning expert witnesses, and debating ( deliberation )
3. Get respondents to respond again to original survey
Given that the idea is to poll a random sample of sufficient size to produce results of
standard expected in opinion polling, 100’s, the deliberative part of the exercise is
expensive.
Deliberative polling is rare.
Citizens’ juries
Citizens’ juries involve the public in their capacity as ordinary citizens with no
special axe to grind. They are usually commissioned by an organisation which
has power to act on their recommendations. Between 12 and 16 jurors are
recruited, using a combination of random and stratified sampling, to be broadly
representative of their community. Their task is to address an important question
about policy or planning. They are brought together for four days, with a team of
two moderators. They are fully briefed about the background to the question,
through written information and evidence from witnesses. Jurors scrutinise the
information, cross-examine the witnesses and discuss different aspects of the
question in small groups and plenary sessions. Their conclusions are compiled in
a report that is returned to the jurors for their approval before being submitted to
the commissioning authority. The jury’s verdict need not be unanimous, nor is it
binding. However, the commissioning authority is required to publicise the jury
and its findings, to respond within a set time and either to follow its
recommendations or to explain publicly why not.
As compared with deliberative polling, a major advantage of the citizens’ jury is
cost.
Box 11.4 Deliberative polling and nuclear power in the UK
In the early years of the twenty-first century the UK government came to the view that, on account of the age of
the existing nuclear plant, security of supply issues, and the climate change problem, it was necessary to re-visit
the question of whether new nuclear plant was desirable.
The UK government initiated a consultation process and subsequently, in July 2006, it issued a report giving its
view that nuclear power had a continuing role in the electricity supply system, and that it would look favourably on
projects to build new nuclear power stations. Consequent upon a legal challenge by Greenpeace, the High Court
ruled that the government's decision making process had been unlawful in as much as it had failed to engage in
adequate consultation.
Following this decision, in May 2007 the UK government initiated a new consultation process, one element of
which was a deliberative polling exercise. This took place in September 2007. The report on this exercise written
by the market research firm, Opinion Leader.
On most questions, the change in the response percentages as between the initial and the final polls was small.
Greenpeace looked at the information provided to the participants and took the view that it was biased in favour
of nuclear power. In October 2007, Greenpeace complained about the work of Opinion Leader to the Market
Research Standards Board The MRSB considered the Greenpeace complaint against B14 of the MRS code of
conduct, which states that MRS members 'must take reasonable steps to ensure that Respondents are not led to
a particular answer.' The MRSB found that Opinion Leader had not complied with B14, noting that 'deliberative
research is a relatively new technique and that there are no current MRS guidelines on preparation or review of
research materials specific to deliberative research'.
The UK government published Meeting the Energy Challenge: A White Paper on Nuclear Power in January in
2008, in which it drew on the results of the consultation exercise, and in which it stated its conclusion that 'it would
be in the public interest to allow energy companies the option of investing in new nuclear power stations' and that '
the government should take active steps to facilitate this'.