Ecological Economics 34 2000 393 – 408
ANALYSIS
Project analysis as input to public debate: Environmental valuation versus physical unit indicators
Karine Nyborg
Di6ision for Resource and En6ironmental Economics, Statistics Norway, PO Box
8131
,
0033
Oslo, Norway Received 24 August 1999; received in revised form 16 March 2000; accepted 23 March 2000
Abstract
Monetary valuation of environmental change is useful if one aims to rank alternative projects according to some specific social welfare function. However, if the project analysis is intended as background information to a
democratic debate, the advantages of monetary valuation are less obvious. This paper analyzes aggregation of information, taking normative disagreement explicitly into account. It is demonstrated that monetary valuation is not
always more informative than a physical unit measure of environmental change. © 2000 Elsevier Science B.V. All rights reserved.
JEL classification
:
A11; D61; D78; D83; H43 Keywords
:
Cost-benefit analysis; Environmental valuation; Democratic decision-making www.elsevier.comlocateecolecon
1. Introduction
Cost-benefit analysis of environmental change is a central topic in the environmental economics
literature. For
example, Michael
Hanemann 1994, p. 19 argues as follows — ‘The ability to
place a monetary value on the consequences of pollution discharges is a cornerstone of the eco-
nomic approach to the environment. ... Placing a value on [goods that cannot be bought and sold
in a market] can be essential for sound policy.’ Similarly, Navrud 1992, p. 37 claims that ‘we
need to know the marginal value of environmen- tal goods to find the socially ‘right’ optimal
quantityquality of different environmental goods.
On the other hand, skeptics have argued that traditional cost-benefit analysis is too ambitious,
and simplifies too much, in its attempts to aggre- gate all relevant information into one single indi-
cator of projects’ social desirability e.g. Kelman, 1981; Sagoff, 1988; Bromley, 1990; Vatn and
Bromley, 1994. And in fact, public debate and perhaps also applied decision-making frequently
Tel.: + 47-22-864868; fax: + 47-22-864963. E-mail address
:
karine.nyborgssb.no K. Nyborg. 0921-800900 - see front matter © 2000 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 1 - 8 0 0 9 0 0 0 0 1 8 0 - 4
seem to be framed more in terms of physical unit indicators
than monetary
value measures.
Throughout publications such as OECD’s Envi- ronmental Performance Reviews e.g. Organiza-
tion for
Economic Co-Operation
and Development, 1996, OECD’s Environmental In-
dicators Organization for Economic Co-Opera- tion and Development, 1998, or in political
documents for example, Ministry of the Environ- ment, 1996, physical unit indicators are used
extensively to describe and discuss environmental changes and their importance: the number of
endangered species; The size of protected areas; or the ambient concentration of SO
2
are merely a few examples. To the extent that monetary unit
indicators are discussed at all, the focus in the above-mentioned documents is on costs, such as
spending on environmental RD, or required funding for environmental clean-up. Monetary
benefit estimates based on individuals’ willingness to pay for environmental changes are surprisingly
rare, considering economists’ emphasis on such information as a basis for sound policy. More-
over, some analyses indicate that even when mon- etary benefit estimates are indeed available, their
impact on policy may be very limited Fridstrfm and Elvik, 1997; Nyborg, 1998; Kuik et al., 1992.
Monetary valuation is obviously useful when the goal of a cost-benefit analysis is to provide a
final ranking of policy alternatives. However, a very common goal of economic analysis is to
pro6ide background information to a public debate. The latter aim differs from the former in a funda-
mental way — while a final ranking requires that the policy-maker’s normative views are taken into
account for example, formalized as a social wel- fare function, democratic debate requires, in-
stead,
that citizens
have access
to factual
information which can, as far as possible, be distinguished from normative judgement.
1
In this context, the advantages of monetary valuation
and cost-benefit analysis are much less obvious. Although a cost-benefit analysis can, in theory,
be performed according to the normative views of any citizen, it cannot simultaneously be based on
the normative views of e6ery citizen, except in the absence of normative disagreement see Dre`ze and
Stern, 1987, pp. 955 – 958. This represents a prob- lem when cost-benefit analysis is used as informa-
tional background to public debate. The question is, however, whether the alternatives, such as rely-
ing on physical unit indicators or other informa- tion, are any better.
Below, I will use a simple formal model to analyze the information requirements for demo-
cratic environmental policy-making and debate. My aim is to characterize information sets which
enable any individual decision-maker to arrive at well-founded project evaluations in accordance
with hisher own ethical or political views. I will assume that the amount of information an indi-
vidual can perceive about each project is limited, and that each individual gets exactly the same
information. The main conclusion is that when there is normative disagreement, valuing environ-
mental changes in monetary terms is not necessar- ily more informative than a physical unit measure
of the environmental change. In some cases, mon- etary values will actually be less useful than phys-
ical unit measures. The widespread use of physical unit indicators in the public debate on environ-
mental issues may thus have a quite rational explanation.
2
Perhaps surprisingly, the above re- sult may hold even if lump-sum transfers are
feasible. Further, when normative disagreement is present, one cannot solve the problem by assum-
ing that the income distribution is socially optimal.
Throughout the paper, the term decision-maker denotes any individual participating in the politi-
cal process a politician, a voter, or any citizen taking part in public debate. The decision-mak-
ing process is assumed to be of the following stepwise type.
1. The alternatives are specified and described. 2. Each decision-maker subjectively evaluates the
alternatives. 3. Decision-makers’ individual judgements are
aggregated to yield a collective choice.
1
For an extensive discussion of requirements for democratic decision-making, see Dahl 1989; see also Nyborg and Span-
gen 2000.
2
For a general discussion of environmental indicators, see Alfsen and Sæbø 1993.
The paper focuses attention on step 1 and 2, while step 3 is disregarded. Hence, I do not study
how the final collective decision is reached, or what the final decision is; the paper is concerned
with the individual evaluation of projects before processes such as bargaining, voting, lobbying,
etc., begin. One might object that an individual may want to support a project for strategic rea-
sons, so that the collective decision procedure does indeed matter for individuals’ ranking of
projects. However, if strategic behavior is to make any sense, the individual must first know which
projects he really prefers. Hence, his evaluation in step 2 does not necessarily correspond to infor-
mation he reveals to others in step 3.
In Section 2, I present a model where several individuals participate in a decision-making pro-
cess. Each decision-maker uses available informa- tion and her own normative views to judge the
welfare effects of alternative projects. In Section 3, the model is used to discuss the performance of
cost-benefit analysis as informational input to public debate. It is demonstrated that aggregate
net willingness to pay information is too aggre- gated for this purpose, in the sense that only
decision-makers who accept certain controversial assumptions can use this information to evaluate
projects in accordance with their own ethical views. Section 4 shows that net willingness to pay
by groups may be useful as information for all participants in the debate, but this requires that
groups are chosen in a particular way — within groups, welfare weights must be equal for every
group member, according to every decision- maker. This is clearly difficult to achieve in prac-
tice since decision-makers’ welfare weights are usually not known. If such groups are identified,
however, it turns out that individual welfare judgements can alternatively be based on physical
unit measures of environmental change. Hence, monetary valuation of environmental change is
not essential in this case.
Section 5 demonstrates that for projects with particularly simple income distribution effects, it
is possible to provide sufficient information to the public debate without making assumptions on
decision-makers’ welfare weights. This requires, however, that environmental changes are de-
scribed using physical unit indicators, not mone- tary values. Thus, for such projects, monetary
valuation is less useful as input to democratic debate than physical unit indicators. Section 6
concludes.
2. Normative disagreement in public debate: A simple model
