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Edited by Scott Farrow

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William K. Bellinger

How much to invest is a fundamental question applying equally well to socially valued public investments as to the private sector. Benefit-cost analysis is the cornerstone of the economic analysis of public policy, and is closely aligned with basic rational choice and market concepts from microeconomics. Information and other constraints often block the direct application of marginal analysis in policy decisions, but the conceptual role of marginalism can still be useful in interpreting cost-benefit analysis. While all policy analysis texts that emphasize the economic dimensions of policy cover the basics of marginal analysis, the sources of market inefficiency, and basic decision rules for policy analysis, the connections between marginal analysis and non-marginal policy decision rules are seldom emphasized. This chapter limits its discussion of marginal analysis to the concepts of optimal quantity and optimal allocation rather than the market based concepts of surplus, equilibrium and elasticity, which are discussed in later chapters. This chapter begins by reviewing marginal and non-marginal concepts and measures for policymaking, and then discusses a set of basic policy decisions that can be informed by these concepts. Student exercises are included and answered in the appendix to the chapter.

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Michael Kemp, Edward Leamer, James Burrows and Powell Dixon

This chapter presents findings from a study exploring a variety of tactics intended to enhance respondent awareness of budget constraints in answering CV questions, including methods that value a composite good and allocate a total value across different parts of the composite. The research used, as a test bed, a prominent 1995 survey concerning the prevention and remediation of marine oil spills off the central California coast (the “COS study”). Approximately 2400 California households were surveyed online in 2014. Analysis of the responses to split-sample variants of the questionnaire produced the following conclusions: (1) the study evidenced a very marked lack of sensitivity to a huge scope difference (between the COS good and a much larger composite good); (2) the composite good estimate of WTP allocated to marine oil spills was markedly smaller than the single-focus estimate; (3) sizeable proportions of respondents reported various types of cognition difficulties in their responses, and the resulting WTP estimates are sensitive to those difficulties; (4) respondents presented a single-focus COS referendum after completing a budget allocation exercise were slightly less favorable to COS than those not given the budget exercise; (5) a sizeable proportion of respondents experienced cognition difficulties with part-whole relationships; and (6) within-questionnaire “wording additions” intended to enhance budget awareness had a relatively small effect on WTP estimates.

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Brian D. Israel, Jean Martin, Kelly Smith Fayne and Lauren Daniel

Despite myriad methodological shortcomings, some economists continue to advocate for the use of contingent valuation (CV) and other survey methods to estimate non-use values of natural resources. Federal regulatory agencies also continue to explore these methodologies, although both the OPA and CERCLA regulations strongly disfavor their application, and no court has actually relied upon a CV or a similar study to determine the value of natural resource damages. Indeed, several courts have refused to admit CV studies into evidence, ruling that the studies were not an accurate or reliable measure of actual loss. The better and more reliable approach for valuing natural resource loss, from both a legal and policy perspective, is based on the cost of projects needed to repair, replace, or return injured natural resources to baseline conditions where practicable, and compensate for the temporary or interim loss of resources until restoration is complete.

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Edited by Daniel McFadden and Kenneth Train

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Harry Foster and James Burrows