Chapter 4: A Blueprint for a Cost–Benefit Analysis of a Water Use Conflict – Hydroelectricity versus Other Uses
Per-Olov Johansson and Bengt Kriström INTRODUCTION 1 This chapter uses a small open economy general equilibrium cost–benefit rule to evaluate small changes in power production by companies that are (totally or partially) owned by foreigners. This reduction causes positive environmental externalities. The core of the rule can be viewed as a contract specifying the (minimum) compensation paid to a company in lieu of a specified reduction in its level of production. In addition, our rule specifies how to handle tax distortions and indicates how to put monetary values on some important externalities. By necessity, our presentation must be compact. There is a huge literature on project evaluation. Quite arbitrarily, we refer the reader interested in reading more about the theoretical principles of project evaluation to Drèze and Stern (1987), Johansson (1993) and Myles (1995). We use the cost–benefit rule to assess small reductions in the level of electricity generation at the hydroelectricity plant at Dönje in Sweden. Water is diverted from electricity generation to the natural river channel (dryway). This creates environmental and recreational benefits. We then discuss how to assess the different items of the cost–benefit analysis (CBA). In particular, we present a contingent valuation study where local residents participate in a hypothetical referendum. The web-based questionnaire has some novel features with respect to the format of the valuation question since we introduce an open-ended willingness-to-pay (WTP) question plus an interval question. We also put some numbers on the different items of the...
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