Valuing the social/environmental impact of a project.

In environmental economics, when we do a cost benefit analysis of a proposed project we are typically valuing net economic or financial benefits vs environmental and social costs.

Let's take a fairly typical example - the construction of a Dam, Jonathan Harris frames the issue like this: "The project will have major economic benefits: hydro electric power, a stable water supply for irrigation, and flood control. It will also have negative effects: Farmland and wilflife habitat will be flooded, communites will ahve to relocate, and certain fish species may become extinct. The project may create new recreational opportunities for lake boating and fishing, but it will reduce scenic white water rating and hiking. ... Some costs and benefits are relatively easy to assess. ... But how can we put a dollar value on the social and ecological lossses that will result?".*

And so we do go on to try monetize the value of environmental damages - using various methods, such as people's willingness to pay to preserve, people's willingness to accept payment for damage, valuing equivelent substitutes for that environmental asset, or examining the value of other goods in relation to the environmental asset (Hedonic pricing - eg looking at the value of houses relative to the proximity of a nature reserve).
Certainly these methods can be usefull to an extent, though it becomes much harder or less reliable for values like 'spiritual value' or asthetics.

I argue, that we need to focus in more depth on the environmental and social benefits of the project. In the example of the dam, just taking the benefit of the additional electricity produced, we shouldn't stop our valuation at the amount of electricity it will produce. We should examine the longer term effects of that as well.

There are two scenarios that would arise from the additional electricity.
-Consumption of electricity remains the same - and less electricity is generated from other sources (eg coal fired plants).
-Consumption of electricity increases, used either in capital or end use consumption, (eg we could run another factory using the additional electricity, or consumers watch more TV, use air conditioning more etc).

This gives us a different method for weighing up the costs vs benefits. We can compare 'Is the flooding/relocation/extinction worth not burning that coal?'. We may be comparing apples and oranges here, and as economists it's nice to be able to put everything into a single perfectly relative $ value, but as we've seen, it's hard to monetize some values. At least this method gives us more perspective.


*Harris, Jonathan M, Environmental and Natural Resource Economics, 2nd ed, 2006, Houghton Mifflin Company

A thought experiment in capitalism.

Let's start with an even playing field.

Imagine you have two guys, Guy A, and Guy B, they both work the same job at a factory, earning $10,000 a year. After their basic living expenses (food, shelter) they have an disposable income of $1000 a year.

Guy B spends his money on booze. This has the flow on effect that he indirectly partially employs another guy to make the alcohol.
Guy A is disciplined and saves his money. He buys a taxi with his saved money. This has the flow on effect that he indirectly partially employs another guy to build a car.
Guy A (now a capitalist - as he owns some capital - the taxi), continues to work at the factory, but employs someone else to run the taxi.
Effectively here - Guy A and B's choice as to where to spend their money - determines other employment arrangements. Another person in the economy is going to be either a brewer or a car-builder, either going to produce capital or consumer goods - depending on how Guy A and B decide to spend their money. (We're assuming perfectly transmutable skills here).

The town they live in values the taxi service (ie they get more value out of it, than they pay to use it) - and thus the enterprise is a success - and Guy A manages to extract a profit (ie he charges people more than he pays the taxi driver). Guy A's taxi enterprise, on the face of it - seems like a win win situation. Guy A has some more income, and the town have a service that extract value from. Also - growth has occurred - another person has been employed due to Guy A's choice to invest in capital rather than consume.

So let's discuss this state of affairs.
The reason we say that Guy A should keep the additional profit, is not because he deserves it for his discipline (which really delves into moralistic type thinking), but rather we talk in terms of incentives. We allow people to keep the profits of their capitalistic ventures to motivate them to undertake those ventures.

The argument here is - if Guy A wasn't allowed to keep his profit, then he wouldn't bother saving his money, and would join Guy B drinking.
But let's question this - let's say the profit is then equally distributed through out the society. Guy A still receives additional benefit for his saving, both in his share of the profit, and the value of having a taxi service. Is this not incentive enough?

Let's consider how socialists and anarchists would approach this.
Ultimately - under a soviet style socialism - Guy A and Guy B wouldn't have a choice of what they spend their disposable income - (well - their choices would be restricted to a package that the socialist bureaucrat decides they are allowed to spend on).
In the capitalist example - the decision to have a guy working building a car - instead of brewing alcohol comes directly from Guy A's decision to spend his disposable income. Under socialism this would come from bureaucrat decision. Under capitalism - it is incentive that motivates allocation of resources , under socialism it is policy. This has the classic problems of socialism/government ownership - being rife with inefficiencies, vulnerability to corruption, and lack of direct incentive to make an efficient choice.

For anarchists... to me it seems that there is a lack of a model of how things would actually work. But it seems that the guy that can either work as a brewer or a carbuilder, would make the decision himself to build a car instead. Or the town collectively decides they want a taxi and the carbuilder/brewer will fill that demand. But it does leave me wondering what Guy A will do. Bear in mind here, that in order to get the car - consumption of alcohol must be sacrificed - how is Guy A incentivised to sacrifice his consumption? - Under socialism - he simply wouldn't be allocated the alcohol.