The Many Uses of Costs and Benefits
Costs and benefits are getting airtime at the Chesapeake Bay Program these days. A consulting firm has been hired to evaluate the costs of the States’ plans for implementing their respective portions of the Chesapeake Bay TMDL and funding is being sought to support research to evaluate the diverse benefits of achieving the TMDL.
It is not that the Chesapeake Bay Program didn’t already have enough on its plate, what with overseeing the TMDL and all. And, cost/benefit analysis is not something that they have ever done before – at least for public consumption. Moreover, under the Clean Water Act, there is no requirement that benefits exceed costs in the imposition of a TMDL. But, if one looks for a reason for all of this investment in cost/benefit analysis one finds a likely suspect in uncertainty about how serious we are about the TMDL.
Assume a group of economically interested parties who might suffer losses under the more stringent pollution abatement requirements of the TMDL. Such a group might feel that restoring the Chesapeake Bay is an extravagance that our society cannot afford. If they banded together and retained advisors, those advisors would doubtlessly recommend at least two strategic objectives. First, call the science into question. And, second, show that it will cost more than anyone in their right mind would want to pay.
Assume on the other side a group of economically interested parties who have an interest in restoring the Bay, but no attendant financial risks whether this happens or not. That is, they get paid for working on restoring the Bay, but not for actually restoring it. Some in this group are just paid advocates, while others have more direct impact on the development of policies by which the TMDL is to be achieved (i.e., public servants and their staff).
When you place these two assumed groups into current history, you get studies from the first one implying that restoring the Chesapeake Bay is all cost (see: http://www.sagepolicy.com/wp-content/uploads/2009/06/builders4-14.pdf) and studies from the latter group implying that it is all benefit (see http://www.cbf.org/document.doc?id=591). Interestingly, both studies employ the same analytical package (IMPLAN), but each describes results that suit the underlying aims of their respective users. Does this confirm Mark Twain’s contention that there are lies, damn lies and (economic) statistics?
If we strip away the interests of the two assumed interest groups, perhaps we can evaluate the question of costs and benefits to better effect. First, let’s define the cost of restoring the Chesapeake Bay as the sum of the costs of all the things that we must do differently in order to achieve the TMDL. We can define the benefit as the sum of all the value that is generated by a restored Bay. Clearly, to get at costs and benefits we need to compare two different states – before and after.
In the “before” state, costs show up as ecosystem degradation but not as something that is paid by the production and consumption activities that generate that degradation. Since restoration costs are counted as being paid in the “after” state but not in the ‘before’ state, they are all additional. In monetary terms, since our economy will be paying an expense that it did not use to pay, we all will be a little bit poorer. How these costs are distributed matters, but the basic point is, if we don’t count environmental degradation as a cost, then restoration costs are all new and in that sense, the Sage Policy/Maryland State Builders Association study is sort of correct.
On the benefits side, if turning around the decline of the Bay results in more recreational benefits, higher valued harvests of the Bay’s living resources, increased property values, etc, then those gains will count as economic benefits to restoration. Additionally and importantly, each of us who has been disappointed about the degradation of the Bay will be relieved of that disappointment when the degradation is turned around. Consider the question: What would you pay to switch out of a group that has to say, “we turned the Chesapeake Bay into a septic mess”, into a group that can say, “we changed the way we do things so that we could have a healthy Chesapeake Bay”? Economists will be asking a question like that in their evaluation of benefits of Bay restoration and the smart money says that the values implied by our answers will show the benefits of restoration to be greater than the costs.
If none of this seems all that satisfying, welcome to my world. We don’t know the least costs by which the TMDL can be achieved and we can only guess at the values that might be generated by actually restoring the Bay because it hasn’t happened yet. People’s answers to willingness-to-pay questions change at the drop of a hat. I suppose that it will give people something to talk about, but it seems to me that there are more important questions around. Like, what will it take to ensure that our choices for restoring the Bay generate the smallest cost possible (i.e., how do we keep from getting any poorer than we have to)? Or, how can we establish incentives to innovate so that the costs of restoring and maintaining the Chesapeake Bay fall over time? How can we keep from disproportionately hurting any particular group and spread the costs equitably while maintaining incentives to innovate and reduce costs?
Maybe we can get around to my questions next year.
