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