3. Valuation & Cost Benefit Analysis
Environmental economics places a lot of emphasis on valuation and cost-benefit analysis as it may be used to assess a range of choices for dealing with problems related to the utilization of environmental and natural resources.
Since in environmental economics, the goods and services involved are environmental assets, valuation and cost-benefit analysis of the assets are important.
Valuation
Environmental economics places a lot of emphasis on valuation since it is used to assess a range of choices for dealing with problems related to the utilization of environmental and natural resources.
Valuation refers to the process of assigning a monetary value to environmental goods and services, which is not included in the general market trade.
The valuation of ecological resources is a challenging procedure since it is challenging to put a monetary value on intangible advantages like clean air and a healthy ecosystem. It can be challenging to assign a value to resources that have numerous uses. For instance, mountains may give scenic beauty, regulate river flow patterns, flood prevention, and enhance the soil quality for farming. Thus, the valuation of the mountains is difficult to achieve.
Values can be attributed to environmental resources based on techniques of use and non-use. By watching what customers are prepared to spend, it is simpler to place value on an item already in use.
A few of the methods used for the valuation of environmental goods are:
- Market-Based Methods
- Travel Cost Method
Valuation helps the decision-makers understand the economic importance of environmental resources and the consequences of their degradation.
Cost-benefit analysis
The goal of cost-benefit analysis (CBA) is to balance the actual and perceived benefits of a policy. Therefore, the most beneficial policy is the one with the largest excess of benefits over costs.
Benefits refer to situations in which human well-being is increased, whereas costs are situations in which it is decreased.
To account for the time value of money, costs and benefits that will be recognised in the future are discounted using a discount factor. The expenses of opportunity costs, internal and external costs, and externalities outweigh the benefits of additional money, a higher standard of living, clean beaches, and clean water.[1]
Example
Consider a government highway project. Let us outline the costs and benefits of the project.
Costs: construction costs, land acquisition, and potential environmental degradation
Benefits: reduced travel time, increased economic activity, and improved transportation efficiency
Cost-benefit analyses assess whether the economic benefits justify the environmental loss.