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The Benefits and Costs of Environmental Protection

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Markets and the Environment

Abstract

The previous chapter proposed a destination—economic efficiency—for our journey, but it didn’t give us a road map or even a compass. Imagine you are a policymaker deciding whether to approve construction of a hydroelectric dam on a wild river. Even if you embrace the idea of maximizing net benefits to society, how can you measure the costs and benefits of the project? How can you weigh a cheap, clean source of electricity against the damage to fish populations and the loss of rapids for rafting? How should you decide whether to build the dam or let the river run wild?

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Reference

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  29. It is worth pointing out that strict Pareto efficiency is much less attractive as a general welfare criterion for evaluating overall outcomes, such as a particular equilibrium achieved by a market economy. Indeed, dramatically unequal distributions of income can be deemed Pareto efficient as long as distributing money from the rich to the poor would make at least one rich person less well off, as Amartya Sen has famously pointed out. See Amartya K. Sen, Collective Choice and Welfare (San Francisco, CA: Holden-Day, 1970). Note that Sen’s critique is essentially a much more forceful version of the argument made in the text—namely, that applying the strict Pareto criterion in the real world would result in too much loyalty to the status quo, regardless of the attractiveness of alternative proposals.

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  30. In fact, this equivalence between maximizing net benefits and satisfying the potential Pareto criterion, though commonly asserted in the economics literature, turns out not to be precisely correct. Paul Milgrom has pointed out that the equivalence does not hold when people are altruistic, that is, when they care directly about the utility of others. Suppose person A cares about person B’s utility in addition to her own. Then a policy that provides positive net benefits, with B receiving the gains and A bearing the losses, might fail the potential Pareto criterion: Any transfers from B to A would lower B’s utility and so diminish the gain to A, possibly ruling out a strict Pareto improvement. Although the logic of this argument is airtight, it is also somewhat contrived. In our view, the close link between maximizing net benefits and the Kaldor–Hicks criterion continues to offer a strong normative grounding for benefit–cost analysis. See Paul Milgrom, “Is Sympathy an Economic Value? Philosophy, Economics, and the Contingent Valuation Method,” in Jerry A. Hausman, ed., Contingent Valuation: A Critical Assessment (Amsterdam: North-Holland, 1993), 417–435.

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Further Reading

  • Arrow, Kenneth J., Maureen L. Cropper, George C. Eads, Robert W. Hahn, Lester B. Lave, Roger G. Noll, Paul R. Portney, Milton Russell, Richard Schmalensee, V. Kerry Smith, and Robert N. Stavins. 1996. “Is There a Role for Benefit–Cost Analysis in Environmental, Health and Safety Regulation?” Science 272: 221–222.

    Article  CAS  Google Scholar 

  • Burtraw, Dallas, Alan J. Krupnick, Erin Mansur, David Austin, and Deirdre Farrell. 1998. “The Costs and Benefits of Reducing Air Pollutants Related to Acid Rain,” Contemporary Economic Policy 16: 379–400.

    Article  Google Scholar 

  • Freeman, A. Myrick III. 2003. The Measurement of Environmental and Resource Values, 2nd ed., Resources for the Future, Washington, DC.

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  • Kelman, Steven. 1981. “Cost–Benefit Analysis: An Ethical Critique,” with replies by James Delong, Robert Solow, Gerard Butters, John Calfee, and Pauline Ippolito, AEI Journal on Government and Social Regulation (January/February): 33–40. Reprinted in Robert N. Stavins, ed. 2012. Economics of the Environment: Selected Readings, 6th ed., Norton, New York, 254–269.

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  • Metrick, Andrew, and Martin L. Weitzman. 1998. “Conflict and Choices in Biodiversity Preservation,” Journal of Economic Perspectives 12(3): 21–34.

    Article  Google Scholar 

  • Morgenstern, Richard D., ed. 1997. Economic Analyses at EPA: Assessing Regulatory Impact, Resources for the Future, Washington, DC.

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  • National Center for Environmental Economics, U.S. Environmental Protection Agency. 2010. Guidelines for Preparing Economic Analyses. EPA 240-R-10-001, U.S. Environmental Protection Agency, Washington, DC. Available at http://yosemite.epa.gov/ee/epa/eerm.nsf/vwAN/EE-0568-50.pdf/%24file/EE-0568-50.pdf.

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  • Pasurka, Carl. 2008. “Perspectives on Pollution Abatement and Competitiveness: Theory, Data, and Analyses,” Review of Environmental Economics and Policy 2: 194–218.

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  • Pizer, William, Matthew Adler, Joseph Aldy, David Anthoff, Maureen Cropper, Kenneth Gillingham, Michael Greenstone, Brian Murray, Richard Newell, Richard Richels, Arden Rowell, Stephanie Waldhoff, and Jonathan Wiener. 2014. “Using and Improving the Social Cost of Carbon,” Science 346(6214): 1189–1190.

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  • Sen, Amartya K. 1970. Collective Choice and Welfare, Holden-Day, San Francisco.

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  • Toman, Michael. 1998. “Why Not to Calculate the Value of the World’s Ecosystem Services and Natural Capital,” Ecological Economics 25: 57–60.

    Article  Google Scholar 

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Authors
  1. Nathaniel O. Keohane
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  2. Sheila M. Olmstead
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© 2016 Nathaniel O. Keohane and Sheila M. Olmstead

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Keohane, N.O., Olmstead, S.M. (2016). The Benefits and Costs of Environmental Protection. In: Markets and the Environment. Island Press, Washington, DC. https://doi.org/10.5822/978-1-61091-608-0_3

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