ECO 3620. Environmental Economics

Benefit Cost Analysis

1.	Comparing Benefits and Costs
	Executive Order 12291 “Federal Regulation” signed by President Reagan in 1981 that first required a regulatory impact analysis be conducted for every government project with at least a $100,000 cost and that benefit-cost analysis be done whenever permissible by law
2.	Decision Rules
	Net benefits Benefit cost ratio Internal rate of return Table 10.4 (page 195)
3.	Net Present Value
	Discounting The appropriate discount rate (matters*) Perfect capital markets: real market interest rate Imperfect capital markets: social rate of time preference, social opportunity cost of capital www.env-econ.net on discount rates
4.	Sensitivity Analysis
	Theory Upper, lower and base case benefits and costs Discount rate for streams of benefits and costs
5.	Other types of analysis
	Economic impact analysis Cost-effectiveness analysis Natural resource damage assessment

*"The present value of the welfare costs are estimated by assuming the impacts are equal to zero in 2004 and increase linearly to 2080. Using a 1% discount rate, the present value of the welfare costs assuming no increase in population or income is $5.7 billion. ... Using a 2% discount rate, the present value of the welfare costs assuming no increase in population or income is $3.7 billion. ... Using a 5% discount rate, the present value of the welfare costs assuming no increase in population or income is $1.3 billion."