Economics, Environment, Latest

369. BCA criticisms 5: “money isn’t everything”

I’ve heard people express opposition to the use of Benefit: Cost Analysis because they say that it is too focused on money and neglects important non-financial benefits. While that’s true for some individual BCAs, others do a good job of capturing the intangible or non-financial benefits that a project can generate.

I guess it’s understandable that non-economists might think that BCA is solely about monetary benefits and costs, but it isn’t. It’s about values and preferences of all types and, if done well, includes allowance for complex factors like how people behave and how to accommodate risk and uncertainty. For some types of projects (e.g., those related to environment, recreation, or health), non-financial benefits (also called non-market values or shadow prices) are the main benefits, so doing a BCA without including them would probably be a waste of time.

The best way to include them is to express them in monetary-equivalent terms. By doing that, we can express all of the benefits from the project in a common currency and ensure that our BCA metrics include all relevant benefits. It also helps us to weigh up the relative importance of benefits of different types.

Expressing intangible benefits in monetary-equivalent terms doesn’t mean we only care about money.  We are not trying to turn them into commodities. They are still intangible benefits. We’re just using money as a convenient and helpful way to measure their magnitude. That is, we are using money for only one of its three main uses: as a store of value, as a medium of exchange, and as a way of measuring value.

How do we monetise these benefits? I’ve talked about that quite a bit in other Pannell Discussions. For a reminder, check out PDs 218 to 221. It comes down to estimating the amount of money that people would be willing to pay for an intangible benefit if they had to pay for it. This is consistent with the way we measure the benefits of market goods.

When doing a BCA, even if there isn’t the time or money to do an original non-market valuation study, there are probably some existing studies that can be used to estimate the relevant monetary-equivalent values. Extrapolating from previous studies, known as “benefit transfer”, is very common and a lot of thought has been given to how best to do it.

In recent years I’ve been involved in several projects to collate databases of these studies for specific areas: water, natural hazards and threatened species. Together they include results from hundreds of studies and provide thousands of non-market values.

There are other less specialised databases available, including the Environmental Valuation Reference Inventory (EVRI).

The bottom line is that the impression that BCA (and economics more generally) is only concerned with money is incorrect.

However, it’s true that many BCAs don’t include NMVs even where it would be beneficial to do so. At the moment, government guidelines for BCA tend to give people an easy way out if they don’t want to use non-market values to measure intangible benefits. They may offer the option of calculating the break-even value of the intangible benefit – the value that would flip the BCA result from being unfavourable for the project to favourable. The decision maker then has to judge whether the value is above or below the break-even value. That can be helpful in some cases, but often there are too many uncertain inputs for it to be a good solution.

Some guidelines say that, if it is too difficult or costly to obtain monetised values for intangible benefits, a benefit: cost analyst could just describe the intangible benefits in words. While that is better than ignoring them altogether, I’d like to see government guidelines provide more encouragement for people to monetise non-market values and include them in their BCA calculations.

Using benefit transfer, even based on limited evidence, would be better than either of those options. The reality is that there would be some non-market value evidence available that is relevant to most projects. Guidelines could specify that this evidence should be used unless it is judged to be of too poor quality.

Other BCA Criticisms

  1. Any result you want
  2. Too much uncertainty
  3. Discounting is bad
  4. Not fair
  5. “Money isn’t everything”

Video version of this blog post

Playlist of videos for all five BCA Criticisms

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Further reading

Pannell, D.J. (2012). Valuing environmental intangibles, part 1: The options, Pannell Discussions 218.

Pannell, D.J. (2012). Valuing environmental intangibles, part 2: The pro’s, Pannell Discussions 219.

Pannell, D.J. (2012). Valuing environmental intangibles, part 3: The cons, Pannell Discussions 220.

Pannell, D.J. (2012). Valuing environmental intangibles, part 4: The upshot, Pannell Discussions 221.