Civil Engineering Reference
In-Depth Information
values. The index reflected the state of natural resources, or ecological conditions,
from 1990 to 2008 for an initial group of 20 countries, to determine whether
national policies are sustainable in the long term (UNEP 2012). Significant gaps in
the valuation process remain, but the work of Costanza et al. (1997) has clearly
triggered an international movement that will influence national accounting systems
for many decades to come. The only problem is that the environmental valuation
debate is in some ways seen as a distraction from the real problem of pursuing the
goal of continual and sustained economic growth - this will make more sense once
you have studied the conventional accounting systems used to measure economic
activity outlined in
Chapter 13
.
Key Points 11.3
❍
Placing monetary value on externalities is problematic. There are three
basic methods: contingent valuation, travel cost and hedonic pricing.
❍
Following the publication of Costanza's (1997) influential paper, a
controversial catalogue of indicators have been produced to capture the
value of the world's ecosystem services.
❍
At Rio+20 it was confirmed that nations need to move beyond measuring
economic success purely on the basis of the amount of goods and services
their citizens consume each year.
COST-BENEFIT ANALYSIS
When the total costs and benefits of a project cannot be adequately represented by
market prices, there is a case to use an alternative method of investment appraisal.
Resources that are not allocated through markets, and which therefore do not have
a market price, need to be brought into the picture. This is where the technique of
cost-benefit analysis
may be useful.
This method of resource allocation includes externalities as part of the process.
It therefore manages to include aspects that most methods of resource allocation
omit. In these analyses, external costs and benefits are considered together with
internal (private) costs and benefits to provide a fuller picture. Obviously, for this
technique to work, all issues need to be expressed in a common denominator for a
'total price' to be calculated. As a result, what may not seem viable in conventional
financial accounting terms may appear viable in the broader cost-benefit appraisal.
Cost-benefit analysis is easier in theory than in practice. There are the problems
of valuation (as we have discussed above) and there are issues about selecting the
externalities. Inevitably, the selection of what is - and what is not - relevant relies
on normative decisions based on value judgements. For example, when identifying
the external costs of a new underground line in London, the economists conducting
the cost-benefit study did not include anything about terrorist attacks on passengers.
Despite the difficulties, economists have carried out many cost-benefit
analysis studies to evaluate specific public sector investments. Examples include
