Cost–Benefit Analysis of Soil Degradation and Restoration - Principles of Sustainable Soil Management in Agroecosystems - page 233

The alternative efficiency criteria include (1) the ratio of benefits to costs, (2) the
net present value, (3) the internal rate of return, (4) the payout period, and several
other lesser known criteria related to optimal time phasing of projects, and the opti-
mal utilization of scarce foreign exchange. Several authors, including Dasgupta and
Pearce (1979), Gittinger (1982), and Ward (1976a,b), have explored the decision cri-
teria issue in depth. These criteria and the resulting ranking of alternative sediment
management strategies are heavily influenced by the nature of future benefit and cost
streams, the ratio of future operating costs to initial capital outlay, and the nature of
the capital or budget constraint.
Analysts should also be concerned with the equity or income distribution impacts
of alternative soil management strategies. For example, Korsching and Nowak (1982)
argue that low income farmers may be disproportionately impacted by the costs of
many soil erosion or sediment control strategies. This can result from their farming
of a higher proportion of erodible soils, possessing fewer savings to cover initial
investment demands, and having farms too small to capture any major scale econo-
mies in erosion control practices.
Economists use several alternative methods for handling income distribution
impacts including (1) explicit weighting of net benefits by income class, group, or
region, (2) provision of alternative weighting functions and their distributional con-
sequences to decision makers, (3) estimation of nonweighted net benefits by income
class, group, or region, and (4) a constrained maximum or minimum target approach
that maximizes economic efficiency subject to an income constraint or vice versa
(see Ahmed and Hitzhusen 1988).
10.3 TYPES AND MEASURES OF ENVIRONMENTAL
ECONOMIC VALUE
It is possible to develop specific values, measures, instruments, and options for eco-
nomic assessment of environmental service flows related to soil and other natural
resources. The service flows include raw material supply, assimilative capacity,
amenities/aesthetics, human habitat, and plant and animal biodiversity. Figure 10.2
summarizes this process. Direct current use value refers to use of environmental
service flows such as hydropower and water. External values are those uncompen-
sated costs or benefits (externalities) from upstream production or consumption pro-
cesses that are borne or received now or in the future but not reflected in current
prices to producers or consumers. Option value refers to the willingness to pay to
delay the use of something until some future time, while bequest value refers to a
willingness to preserve something for the use of future generations. This is related
to the notion of foregone benefits to future users from current exhaustion of a finite
resource without any close substitutes. Existence value is the willingness to pay for
preservation of plant and/or animal species without regard for their use by humans
(see Dixon et al. 1994; Hoehn and Walker 1993).
Economists use a variety of measures or methods to infer or discover these fore-
going values. Sometimes it is possible to directly observe values in existing prices,
and in other cases, it is necessary to infer values from prices of closely related
complementary goods. In the first case, reduction in commercial fish catch from