Chapter 6: Cost–Benefit Analysis of Environmental Projects and the Role of Distributional Weights
Robert J. Brent and Booi Themeli 1 Introduction Does the standard cost–benefit framework break down when one is dealing with projects that impact the environment? A recent contribution by Brekke (1997) suggested that the standard framework does have inherent weaknesses. The numeraire matters in that a positive evaluation using income as the numeraire could easily be reversed when environmental goods are used as the numeraire. The outcome for environmental projects would then seem to be indeterminate. Johansson (1998, p. 489) responded by arguing that Brekke’s conclusion follows only ‘due to a very unusual interpretation of the meaning of a social cost–benefit analysis’. He therefore proceeds to demonstrate that the numeraire does not matter. Finally, Drèze (1998, p. 484) agrees ‘that Johansson’s rejoinder is undoubtedly correct’, yet he claims that the numeraire does matter if a distributionally unweighted cost–benefit analysis (CBA) is undertaken. The unresolved issue is, how can Johansson’s and Drèze’s analyses both be correct? Apart from this unresolved issue, there is the difficulty that the intuition that motivated Brekke’s contribution was lost in the debate. He argued that it was the fact that environmental goods are of the nature of pure public goods that causes the choice of numeraire to be an issue. Unfortunately the implication of this feature of environmental goods did not appear in his analysis even though the assumption of equal consumption of environmental goods was present in his calculations. Drèze recognized that there was something important in Brekke’s analysis...
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