Environmental cost benefit analysis example

An example would be if a firm installs 3 filters to reduce water pollution and the pollution is reduced by 30%. Since there is uncertainty in CBA it is important to know for which parameter the NPV is most sensitive. Applying Sensitivity Analysis Analysis of this kind refers to 'recalculating NPV when the values of certain key parameters are changed' (Hanley, 79). In other words, if the discounted benefits is greater than the discounted costs, the project should be accepted.Д¦. The project should be accepted if the NPV>0. Applying the Net Present Value Test Net Present Value (NPV) equals the sum of the benefits in present value minus the sum of the costs in present value. A discount rate is used to translate future values into present values.ДҐ. It would be inappropriate to compare receivingВ one million dollars today and receiving one million dollars in 75 years as being equal. For this reason all costs and benefits must be discounted to reflect present values. In the same way, a costВ is considered less detrimental theВ further way in time it is incurred. Discounting of Cost and Benefit Flows A very important concept to realizeВ with CBA is that a benefit is considered more valuableВ the sooner it is received. For in-depth informationВ on valuation,В follow the link.Д¤. Valuing Impacts ValueВ the impact of a specific action or inactionВ in terms ofВ its marginal social cost or marginal social benefit. Examples of this would include: 500 human labor hours required to carry out the project or 3 billion tons of reduced landfill pollutionДЈ. Identifying Physical Impacts of the Policy or Project Identify (in units) the implications of the outcomes. Defining the Project or Policy As well as identifying the choice that will be analyzed, economists must recognize whose welfare is being consideredВ and the time period in question.Дў. The value of environmental costs and benefits are most clearly understood when represented in monetary units, and then balanced against one another.ДЎ. Benefit here means utility: thus, welfare economicsВ looks at ways of comparing outcomes in terms of their contribution to the utility of the population as a whole' (Hanley, 69). These researchers triedВ to 'compare outcomes on the basis of what gives the greatest benefit to the greatest number of people. Welfare economics uses criterion from the Utilitarian philosophy of the eighteenth century.

It helps to answer questions about the benefit of one outcome over another, from a societal standpoint.

Cost-Benefit Analysis (CBA) originated in the area of research called welfare economics.

Environmental cost benefit analysis example