Monthly Archives: March 2009

149 – Cost sharing for environmental works

Sharing the costs of environmental works between the public and private sectors has a nice ring to it, but how to determine the shares? A commonly used principle is that costs should be shared in proportion to benefits received, but this is unlikely to be an economically efficient approach

Cost sharing is one approach to providing environmental payments. It has been widely used as a conceptual and practical approach in Australia. There are a number of reports written about it (e.g. Marshall, 1998; Aretino et al., 2001).

Those two reports are written by economists who know what they are doing. However, in other cases cost-sharing is often taken to imply that costs from environmental works should be borne in proportion to benefits received. For example, if farmers reduce their use of chemicals, they may generate some benefits for themselves, and some benefits for the rest of the community. If the benefits to the community are three times greater than the benefits to the farmer, the idea would be that the farmer would be asked to bear 25% of the costs and the public would bear 75%.

If we accept that any system of environmental payments should be designed to achieve the most valuable environmental outcomes, then this approach to cost sharing is difficult to apply and flawed in principle. There are three problems with it. Two of them can potentially be avoided, but one cannot.

To illustrate, suppose that a farmer plants an area of trees on crop land. There are private benefits from provision of shelter for livestock and reduced wind erosion, and public benefit due to provision of habitat for wildlife. There are also direct private costs from planting the trees (the labour required, any herbicide used, equipment depreciation) and indirect private costs, because some land that used to grow profitable crops is now occupied by trees (economists call this an “opportunity cost”).

The first problem is that people tend to look at very partial estimates of the benefits, often ignoring some or all of the costs borne by people who implement the works. I have heard people talk about cost sharing based on gross benefits, ignoring both the direct and indirect costs of the works. Sometimes direct costs may be considered, but not indirect costs. In either case, the person implementing the works is being disadvantaged because the measure of private benefit being used to determine their cost share is bigger than their actual net benefit.

The second problem is that the costs that are shared often exclude the indirect costs. The direct and indirect costs are equally important to the farmer, so the exclusion of indirect costs also disadvantages them.

Thirdly, and more importantly, the whole concept of sharing costs according to benefit shares is not economically sound in any case. It cannot lead to the best environmental outcomes, except by chance.

Why is that? Last week in PD#148 we talked about two approaches to environmental payments that can be the most cost-effective approach in particular circumstances.

(a) Small temporary grants or incentive payments to encourage trialing of the desired works (provided that adoption at the required scale provides a win-win outcome), and

(b) Stewardship payments to offset the net cost to landholders from adopting win-lose options (provided the public gains are larger than the private losses).

In case (a) the payments would be pitched at the lowest level that would entice trialing. In case (b), payments would equal the net cost of adoption (direct cost plus indirect cost minus private benefits). A cost-sharing approach would never match either of these cases except by coincidence. Often it departs substantially from an efficient approach: paying far more than necessary to prompt adoption, or offering to pay far less than necessary so that adoption does not occur. In the former case, cost sharing amounts to a transfer of public funds to the private sector. If government wants to do that, fine, but there is no economic or environmental basis for doing so. In the latter case, the policy fails to meets its objective.

In saying this, I’m assuming that the aim is to achieve the greatest environmental benefits for the available public funds. If that is accepted as the goal, then the appropriate approach is to ask (i) what is the least the government can pay and still have the project proceed? (Aretino et al., 2001) and (ii) given a payment of that amount, are the public benefits sufficient to justify paying that much? You can ignore private benefits in question (ii) because asking question (i) in that way effectively means that the private sector is responsible for its own benefits.

Sometimes people assume that my Public: Private Benefits Framework (Pannell 2008) is about cost sharing, but it isn’t. Rather, it implicitly builds in questions (i) and (ii) above. The private benefit axis is used as a predictor of whether people will adopt the works, and to calculate what is the least you’d have to pay to prompt adoption, rather than to work out a cost-sharing arrangement.

David Pannell, The University of Western Australia

Further Reading

Aretino, B., Holland, P., Matysek, A. and Peterson, D. (2001). Cost Sharing for Biodiversity Conservation: A Conceptual Framework, Productivity Commission, Melbourne, http://www.pc.gov.au/__data/assets/pdf_file/0005/8294/csbc.pdf

Marshall, G. 1998. Economics of cost sharing for agri-environmental conservation. Paper presented to the 42nd Annual Conference of the Australian Agricultural and Resource Economics Society, University of New England, Armidale Australia, 19-21 January, 1998. http://www.ruralfutures.une.edu.au/downloads/costsharing_116.pdf

Pannell, D.J. (2008). Public benefits, private benefits, and policy intervention for land-use change for environmental benefits, Land Economics 84(2): 225-240. Here

148 – The Economics of Environmental Payments

Payments to people or businesses to undertake environmentally beneficial works have become more common in recent decades. From an economic perspective, are they a good idea? How big should they be?

Why would a government consider paying someone to do something that benefits the environment? One answer is that, in some situations, environmental payments can be highly cost-effective — they can lead to improved environmental outcomes that are worth much more than the environmental payments. In other words, in the absence of payments, there is what economists call a “market failure”, and the payments overcome that failure.

But why payments rather than regulation? If environmental payments are made, the costs of the environmental improvement are borne by the public (or more specifically by tax payers), consistent with the so-called “beneficiary-pays principle”. An equally valid approach would be to apply the “polluter-pays principle”, requiring people to undertake the environmental works at their own cost. In PD#21 I noted that there is no economic theory to help us choose between these options. The choice is essentially political. In practice, policy makers tend to use a polluter-pays approach when trying to stop people changing to a practice that is worse than current practice, and a beneficiary-pays approach when trying to encourage people to adopt a practice that is better than current practice.

It is important to recognise that, in many situations, neither of these approaches is appropriate. In Pannell (2008) I point out that there are many environmental projects for which the most appropriate policy mechanism is extension (meaning education, training, persuasion, information provision, …), technology change, or no action.

How much to pay?

Looking at different environmental programs around the world, there are three or four different strategies used, in terms of how much governments look to pay people for improved environmental works.

1. Small temporary grants to encourage people to trial the environmental works. In Australia, these grants usually go by the name of “incentive payments”. The hope is that, after trialing, people will decide to adopt the works permanently and at large scale. This can be the most cost-effective policy strategy in certain cases: if the action is win-win, and likely to be adopted at sufficient scale, but is not yet adopted. The market failure being addressed in that case is that people lack accurate information about the works (with the possibly brave assumption that the government has better information). Unfortunately, in Australia incentive payments have mainly been used in situations that don’t match the required combination of circumstances, with the result that they have often delivered far less than hoped.

2. Larger grants, to fully compensate people for the losses they would make by adopting the environmental works. Such losses need not be purely financial. They could include risk, inconvenience, or time, for example. In Australia, these sorts of payments are sometimes called “stewardship payments”. They make sense in situations where the public benefits of environmental works are high enough, and private costs are not too large. The market failure being addressed in this case is a positive externality. If pitched correctly, participants should not make a profit from such payments. (Or to be clear, they shouldn’t make a greater benefit overall than they would have done if they did not participate in the scheme. The benefits of participation might include non-financial elements.) That is the case, for example, if conservation tenders are used to determine the levels of payment. Well targeted stewardship payments can be very cost-effective, but are under-used in Australia relative to smaller “incentive payments.”

3. Larger-still grants, designed to provide a net profit to recipients. These have never been used in Australia, but they are the norm in Europe and the US in environmental programs for agriculture. Payments at this level are not justified on a market-failure basis. They reduce the potential environmental gains that are possible from the program for a given budget.

Another approach to determining how much to pay is “cost sharing” – a concept with pitfalls. I’ll cover that next week.

David Pannell, The University of Western Australia

Further Reading

Pannell, D.J. (2005). Thinking like an economist 21: Using incentives to buy land-use change in agriculture for environmental benefits, Pannell Discussions, No 66, 17 Oct 2005. Here

Pannell, D.J. (2008). Public benefits, private benefits, and policy intervention for land-use change for environmental benefits, Land Economics 84(2): 225-240. Here

147 – PowerPoint tips

I spent last week at a conference. As usual, the use of PowerPoint by speakers ranged from excellent to dreadful. I started amusing myself by writing down the things people did wrong with PowerPoint, and that has led to a set of suggestions for people who aspire to getting their message across effectively.

The obvious things

On each slide, include only a few points – no more than about six, and fewer is better. It is OK to have only one point on a slide.

For each bullet point, include only a word or a few words, not a sentence. The last thing you want is to have to read out what’s on the screen, but if it’s a sentence, you more or less have to. If you have a sentence on the screen but then don’t read it out, the audience will be reading it while you’re saying something else. Or they’ll be scanning through the bullet points trying to work out which one you’re talking about, rather than listening to you.

These days, if you add more and more text to a slide, PowerPoint reduces the font size to make it fit. Don’t fall into that trap. If PowerPoint has had to reduce the font size, you’ve got too much text or too many points on the screen.

Never move the boundaries of the text box to fit more text in. Keep reasonable sized boundaries around the text of your slide.

Use pictures where possible. It’s good to use pictures instead of text to prompt you, if possible. At least use pictures to illustrate or illuminate the point you are making. Most people take in pictures more easily than text. Personally, my natural inclination is to rely mainly on text, but I try to go back and insert pictures, or replace text with pictures, once I have a draft PPT file. Think carefully about which pictures will best illustrate the point you are making.

Keep graphs and tables simple. This is one that many people violate, sometimes to a ludicrous extent. Putting large tables on a slide is just dumb. The audience will spend the whole time trying to work out which numbers you are referring to. Sometimes people put up a large table and then use colours or a box to highlight the few numbers they actually talk about. This is better than not highlighting them, but why not just leave out all of the numbers you are not going to talk about? A table with six to eight numbers in it is good.

Bar graphs are easiest to take in, or use simple line diagrams. Don’t have more than two data series in a graph if possible.

Make sure the text on the axes of graphs is easily big enough to read. Whenever a new graph comes up, start by describing what is on the axes, and then briefly describing the content of the graph, before you get into discussing its implications. People need help to tune into the graph. The same is true of tables, more or less.

Only have one graph or table on the screen. If you want people to compare two data series, put them in the same graph or table.

PowerPoint has the ability to automatically change the format of text and bullets depending on whether the text is a main heading, or a sub-heading, or a sub-sub-heading. To change between heading levels, use these buttons: . I’ve had to help a couple of people who hadn’t found out about these buttons and were trying to change sub-heading formats manually. Not surprisingly, they made a complete mess of it.

It is good to use two heading levels to structure your text on the screen, but avoid using more than two levels.

Don’t switch off all of the lights and stand in the dark so that people can see your slides better. You’re giving a talk. It’s about person-to-person communication. If people can see you, this will be much more effective.

Rehearse your talk and time it. Aim to finish one minute early. As a crude rule of thumb, you should not have more than one slide per minute of speaking time.

I see a lot of talks given by economists. There is a tendency for economists to include algebra in their slides. This is death to good communication. In my view, even if your audience is economists, only a minority can take in algebra off the screen quickly enough for them to really follow you. If you want to give a talk that only 10% of the audience follows, then fine, use algebra, but otherwise steer well clear of it. Use a flow diagram to convey the structure of your model.

If you must use algebra, you need to be sure that the symbols you use will be available on the computer you use to give the presentation. Some symbols you use may be installed on your computer, but not on the one you’ll be using on the day, resulting in an equation full of odd symbols. To avoid this, you can tell PowerPoint to save the fonts used with the presentation. In PowerPoint 2003 you do this by selecting File | Save as | Tools | Save options | Embed TrueType fonts.

If you use foreign language characters or other special symbols, you can run into the same problem as for equations, and the same approach of embedding fonts will work for that too.

Face the audience and talk to them, not to your slides.

Less obvious

Don’t put anything on the screen that you are not going to describe or read out. Never say, “I’ll just let you read that” and then stand there silently. It doesn’t work.

In any tables, all numbers should only be presented to two significant figures (e.g. 170, 34,000, 0.0052). Any more than that makes it harder to read and harder to compare numbers. If you think that two is not enough, you’re mistaken. Using three significant figures implies that, on average, you are accurate to within 0.5% (and possibly as little as 0.1%). Such a small difference is probably not real, and is certainly not important.

If you are pointing to the screen, never do so with your hand some distance from the screen. The audience will get confused about what you are actually pointing at. You should either physically touch the screen, or use a stick or laser pointer. Similarly, don’t use the shadow of your hand as the pointer, as again it can be confusing – some people will try to follow where your hand is pointing, rather than the shadow.

I think it’s important for the audience to be clear about which bullet point you are currently talking about. There are three of ways to do this. You could physically point to the bullet point you are now discussing, you could use “Custom animation” to make the bullet points appear one by one, or you could have only one point on the slide.

I have mixed feelings about Custom Animation of text. Sometimes it is quite good, if you are unfolding a story that is a bit complex and you want to help people build up the story point by point. On the other hand, it is probably best not to do it for every slide, as it slows things down, and it really inhibits navigation through the PPT if you need to go back to an earlier slide. Personally, I do use it sometimes, but only sparingly.

If you do use Custom Animation of text, dim the text that you have finished with so that it doesn’t distract people away from your current point.

Sometimes people have custom animation switched on but then just keep clicking until all of the text is displayed before they start talking. If you’re going to do that, just turn off the custom animation!!

I prefer a template that uses light text on a dark background. In the last few years, the quality of data projectors has improved a lot, so that dark text on a light background is now at least possible, but light on dark is still easier to look at.

Many guides to giving a talk say that you should include a slide that outlines the structure of your talk. These days I rarely do this. I’ve reached the conclusion that it doesn’t really help. It’s better to spend your precious time getting into the story.

PowerPoint offers a huge range of options for transitions between slides. For example you can select Checkerboard Across, Comb Horizontal, Cover Left, Cut, Dissolve, and so on. They are all different ways of removing one slide and replacing it with the next one, mostly with lots of fancy movement. My advice is: don’t use any of them. They are visually distracting and they don’t help. In my opinion they don’t look very professional. Just use the simplest and most basic default transition, where one slide just disappears and the next instantly appears.

The same advice applies to the use of custom animations (for individual elements of the slide). If you use custom animations, just use “appear” and “disappear”, not the fancier options.

Learn the basic key strokes that you can use to move around in a presentation. (Thanks to Tom Croft for highlighting this point.) I’ve seen an amazing number of people stand up to give a presentation and have to ask which keys to press, especially if they need to go backwards. Some don’t even know how to get from one slide to the next! Here are the basics:

Next slide: N, spacebar, enter, page down, down arrow, right arrow, or left-click mouse. Personally I always use the spacebar as it’s big and easy to hit.

Previous slide: P, backspace, page up, up arrow, left arrow. Backspace is the largest and easiest to find of these keys on most computers.

Go to a specific slide: with the slide show still running, type in the slide number (it doesn’t display anywhere) and press enter. Alternatively, press ctrl-S and you get a menu of the slides. These commands are particularly useful if you have custom animations that you want to skip over.

Go to first slide: home

Go to last slide: end

Break out of the slideshow: escape (you don’t have to go to the end of the slideshow). Escape is much better than right clicking and selecting “End show”.

Make a new slide: Click on New Slide on the Home menu (Office 2010 Windows version). Or Ctrl-M gives you blank slide in the default layout.

Change slide layout: Click on Layout on the Home menu (Office 2010 Windows version).

To use your mouse as a simulated laser pointer: when the slide show is running, hold down the control key and the mouse left button simultaneously.

Here’s a tip from Stephen Loss: “A useful PowerPoint tip I picked up during a training session a few years ago was pressing the “B” key to blacken the screen during a presentation, and simply pressing “B” again to bring it back. I find this useful if you want the audience to focus on you for a short period. You see people in meetings using files or books to put in front of the projector. The “B” key is so much easier!!”

Try to include something unusual or memorable in your talk. A physical prop can be a good thing. For example, a professor at my university takes along a baseball bat and hits balls into the audience to illustrate one of his points.

Every talk you give is a chance to impress people that you know what you’re doing and can communicate it clearly. It’s worth taking the time and effort to prepare well.

David Pannell, The University of Western Australia

Further Reading

The Trouble with PowerPoint, BBC Magazine.