Natural Resource Economics
Quiz 3 :
Valuing the Environment
Whether the risk neutrality is an appropriate assumption for benefit/cost analysis or not will depend on various policy options available to us and range of possible outcome for each of these policy options. If one policy option emerges as the dominant policy option in the sense that it confers higher net benefits for every outcome then in that case existence of risk concerning the future is not relevant form policy choice and therefore risk neutrality is an appropriate assumption for benefit/cost analysis. But if dominant solution does not emerge then extra caution (risk assessment) affords an opportunity tom learn more about to a particular decision and its consequences before acting. Risk neutrality is more appropriate for some environmental problems than others. It would be a valid assumption in case of those environmental problems which does not directly impact the majority of population whereas it would not be a valid assumption in the case of those environment problems which directly impact the majority of population. For example, in case of wildlife protection programmes risk-neutrality could be assumed whereas in case of pollution control measures, risk neutrality could not be assumed. According to Arrow - Lind rationale for risk neutrality, when number of risk bearers increases then in that case amount of risk to be borne by each individual diminishes to zero. In other words, total cost of risk bearing become insignificant and thus risk neutrality could be appropriately assumed. Also, in those cases where decision once taken could be reversed at later date, risk neutrality could be assumed. In the given case of desirability of locating a hazardous waste incinerator in a particular town Arrow - Lind rationale for risk neutrality would be appropriate because in case of establishment of waste incinerator, risks involved would be publicly borne and thus the total cost of risk - bearing would be insignificant that is the amount of risk borne by locating the waste incinerator in a particular town by each individual of the town would be next to zero. Moreover, this decision could be reversible in the future that is if pollution level due to burning of rubbish reaches alarming level, this incinerator could be stopped or shut down.
President George W. Bush's order mandating a heavier use of benefit/cost analysis in regulatory rule making was a step towards the subversion of the environmental policy process. It is true that benefit cost analysis can play an important role in formulation of policies with regard to protection and improvement of health, safety, and natural environment and also greatly help the agencies mandated with regulating and protecting environment in setting standards regarding the same but benefit/cost analysis also suffer from hidden value judgments which sometimes affects the outcome adversely and may lead to inefficient policy goals being determined. Secondly, cost/benefit analysis dose not sufficiently answer who reaps the benefit and who pays the cost. For example if a particular technique has benefit exceeding the cost but majority of benefits being appropriated by small minority while large part of cost would be borne by large majority then in that case society would be worse off utilizing the technique irrespective of being rendering positive net benefits. Secondly, as evidence suggests that biases tends to increase or decrease net benefits systematically. In such cases cost/benefit analysis instead of being scientific exercise becomes biased exercise and thus policy goals as well as outcome based on such analysis are definitely inefficient and may sometimes compound the problem. Thus, instead of mandating a heavier use of benefit/cost analysis in regulatory rule making or for designing sensible policy it should be given equal weight along with other information available and should not be considered as major determinant with regards to conduct environment policy making process.