Cost-Benefit Analysis

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The economical benefits of environmental protection can be divided into its market and non-market benefits. Market benefits are measured in terms of increased efficiency and production, savings in the cost of energy expenditure, reduction in cost of health care, and in the creation of new jobs. For example, cleaning the water in a polluted lake can increase commercial fishing and tourism, reduce the rate of infectious disease, and appreciate the price of housing adjacent to the lake, all of which can be measured in dollars. One approach is to use a hedonic regression to estimate the utility or pleasure associated with an improved environment. This technique assumes the price of an item can be calculated by assigning certain characteristics to its constituents and obtains estimates of the value of each characteristic. In essence, it assumes that there is a separate market for each characteristic. For example, hedonic regression can be used to assess the value of real estate in the absence of specific market transaction data. Because one building is different from another, it is often difficult to find an identical building that was sold recently. Instead, it is assumed that a house can be decomposed into several characteristics such as location, number of bedrooms, size of a lot, quality of neighborhood schools, etc. Hedonic regression treats these attributes separately and estimates prices for each of them. This information can be used to construct a price index that can in turn be used to compare the price of housing in different cities or at different times.

The non-market benefits of cleaner lakes are the enhanced diversity of marine life, more enjoyable swimming, recreational fishing and boating, and improved air quality. Non-market benefits cannot be measured directly but can be estimated by polling people on their hypothetical willingness to pay, to avoid incurring specific damage and for the benefit of enjoying a cleaner environment, or willingness to accept compensation for a certain amount of pollution and its associated actual or perceived risks (contingent valuation). Since different people value the benefits differently, the result is contingent upon the questions asked.

Actual risk is often estimated as the probability that a certain pollutant causes a certain number of deaths every year, spread over the affected population. This is usually done by examining data from past cases of human exposure to the pollutant or by extrapolating laboratory data from animals exposed to various doses of pollutants to humans. Many times, however, actual risks do not represent the perceived risks of exposure to pollution. For example, people may perceive that the risk of radiation from nuclear reactors is much higher than the risk from coal reactors, even though data shows the actual health risks from exposure to radiation are far less than those of exposure to air toxins.

Once the environmental benefits of environmental protection are evaluated, we need to evaluate costs of noncompliance by determining losses to property and to humans. Although placing a monetary value to human life seems highly insensitive, unfortunately it is the only way the cost of environmental degradation and damage to humans can be measured. Perhaps a better way to view this approach is to look instead into the benefits of saving lives by investing in various pollution abatement strategies. Depending on age, education, and income, the US Environmental Protection Agency puts a number ranging from $475,000 to $8.3 million for the value of human lives (1). In contrast, the value of life in many poor countries has been estimated to be in tens of thousands of dollars.

Question: Some propose using the discounted future earnings of an individual to estimate the damage resultant from a loss of life. Others suggest the best way to measure the value of a life is by the risk various people are willing to take to accept similar jobs. Comment!

Answer: The first method is often used by the US court system to determine monetary damage for a loss of life. The main objection to this method is that lives of retired people or volunteers are greatly underestimated. The second method looks into how much people value their own lives when they participate in dangerous sports, volunteer for military service, or apply for risky jobs such as police officers and firefighters. The main objection to this approach is that, to support their families, many people have no choice but to accept high risk jobs. Secondly, very few people are adequately informed on the actual risks they are undertaking when they accept a new job or participate in a dangerous endeavor, and therefore their choice of the job or activity is not a true indication of the actual risk they may face. Finally, this method does not take into account the preference of many participants whom are inherently more risk-taking with no relevance to the proceeds they receive. One thing is certain; no matter which approach we use, we must face the ethical dilemma of valuing some lives more than others.


(1) “Putting a Price Tag on Life,” Newsweek, January 11, 1988, p. 40.

(2) Toossi Reza, "Energy and the Environment:Sources, technologies, and impacts", Verve Publishers, 2005

Further Reading

Chapman, D., Environmental Economics: Theory, Application, and Policy,” Addison-Wiley, 2000.

Goodstein, E. S., Economics and the Environment, 4th Ed., John Wiley & Sons, 2002.

Siebert, H., Economics of the Environment: Theory and Policy, Springer Verlog, 2004.

Dauvergne, P., Handbook of Global Environmental Politics, Edward Elgar Publishing, 2005.

Journal of Environmental Economics and Management (JEEM), the journal of Association of Environmental and Resource Economics.

Ecological Economics – Direct Science Elsevier Publishing Company, the journal of the International Society for Ecological Economics (ISEE).

Environmental Economics and Policy Studies – Published by Springer-Verlog, New York is the official journal of the Society for Environmental Economics and Policy Studies.

External Links

US Agency for International Development (

National Center for Environmental Economics (

United Nations Development Program (

United Nations Environment Programme (

Intergovernmental Panel on Climate Change (

World Resource Institute (

Union of Concerned Scientists (