ABSTRACT
Cost-benefit analysis (CBA) determines if a project or policy exceeds its costs and by how much. Social welfare is generally maximised by implementing projects in descending order of their net present values (NPV), or benefit/cost (B/C) ratios. This chapter reviews the principles of CBA and situations where ‘shadow prices’ need to replace market prices because market prices do not reflect the appropriate values of resources. Distributional issues are discussed, including techniques to incorporate distributional issues into CBA, and the distributional-efficiency anomalies that can arise. The chapter concentrates on the environmental economics techniques that can be used to estimate ‘shadow prices’ for non-market benefits and environmental externalities, including effect-on-production, revealed preference and stated preference methods – principally contingent valuation and choice experiments. The problems of using these techniques are outlined. The special issues that arise in using CBA and environmental valuation techniques to appraise long-run sustainability projects and policies, such as climate change, are summarised. Continued development of environmental valuation techniques will result in more accurate and robust values to include in CBA appraisals of sustainability projects and policies.
