Guide to COST-BENEFIT ANALYSIS of investment projects - Ramiri

- expenditure on capital equipment necessary for consumption;♦ the time spent travelling and its valueSpecific problems with this approach are related to ‘multiple purpose trips’; because many trips have more than onedestination, it is difficult to identify which part of the total travel cost is related to one specific destination.Since only the benefits of the direct consumption of the environmental services are considered in this approach,non-use values (option value and existence value) cannot be considered.Averting or defensive behaviour methodThe main assumption of the averting evaluation method is that individuals can insulate themselves from a nonmarketbad by adopting more costly behaviours to avoid it. The cost these behaviours require can be represented byextra-time or by the restrictions they impose on what individuals would otherwise wish to do.Another way to avoid exposure to specific non-market goods is the purchase of a market-good to ‘defend’ theconsumer from the ‘bad’ (defensive expenditures). The value of each of these purchases can be considered theimplicit price for the non-market good that individuals want to avoid.An example could be the installation of double-glazed windows to decrease exposure to road traffic noise. Doubleglazingis a market good that can be seen as a substitute for a non-market good (absence of road traffic noise) and sothe cost of purchasing it can be considered as the price of the non-market good.Specific problems with these approaches could be:- defensive expenditures often represent a partial estimate of the value of the non-market good individuals want toavoid;- many averting behaviours or defensive expenditures are related to joint products (e.g. heating and insulation fromnoise);- individuals or firms may undertake more than one form of averting behaviour in response to any environmentalchange.Cost of illness methodLike the defensive expenditures method, this one focuses on expenditures on medical services and products made inresponse to the health effects of non-market impacts.The difference between the two methods is that usually the decision concerning health care expenditure is not madeby individuals alone, but involves social administrators, politicians and taxpayers. This circumstance introduces acomplex evaluation issue because the decisions of public administrators and politicians reflect not only theassessment of the negative impacts of the non-market good, but also other types of considerations (politics andethics).An additional problem with this approach is that changes in expenditure on treatments of health impacts are usuallynot easily directly observed, due to the stochastic link between health and non-market goods (for example airpollution).Stated Preference MethodsStated preference approaches are survey-based and elicit people’s intended future behaviour in the markets. Throughan appropriately designed questionnaire, a hypothetical market is described where the good in question can betraded. A random sample of people is then asked to express their maximum willingness-to-pay for (or willingness toaccept) a supposed change in the good’s provision level. Consequently, the focus is on real choices and impliedwillingness-to-pay.The main strength of the methods based on this approach is represented by the flexibility they can assure. Indeed,they allow the evaluation of almost all non-market goods, both from an ex-ante and from an ex-post point of view.Moreover, this methodology is able to capture all types of benefits from a non-market good or service, including theso-called non-use values.The main specific methods are:- contingent valuation method- choice modelling method224