A Cost-Benefit Analysis of Pollution

Air might be free, but environmental economists must put a price tag to clean air in order to assess the cost-benefit of pollution control initiatives.
Air might be free, but environmental economists must put a price tag to clean air in order to assess the cost-benefit of pollution control initiatives. (Image: pollution image by Svetlin Rusev from Fotolia.com)

Because pollution is almost unavoidably linked with production and consumption, a zero-pollution policy would probably involve a return to a pre-agrarian civilization. Things are not black and white, however. Sustainability is defined as a fulfillment of present needs that does not compromise the ability of future generations to meet their own. Thus, some pollution, within the coping capacity of the planet, can be considered a fair tradeoff for improved standards of living. In order to know how much is fair and how much is too much, however, it is necessary to perform a cost-benefit analysis of production.

Definition of the Project

A cost-benefit analysis cannot be performed in abstract but must be estimated in terms of a concrete project. Cost-benefit analyses of pollution might be performed in order to gauge the environmental and human impact of an industrial project, to assess the economic feasibility of the implementation of pollution reduction measures, or a combination of both. The definition of the project must include the proposed reallocation of resources in relationship to the status quo and the alternatives, as well as an estimate of the scope and the population that is impacted, with expected gainers and losers.

Valuation of Environmental Impacts

The cost of installing pollution-control equipment, as well as the profits of a pollution-emitting factory, are measured in dollars. In order to avoid the proverbial comparison of apples to oranges, a monetary value must be assigned to priceless goods such as human life and wildlife. Indirect measuring methods often are needed: Although putting a price tag on a coral reef is difficult, one can measure how much are divers willing to pay in order to reach one (travel cost), Likewise, the economic value of a pristine river might be deduced from the difference in the price of two land developments that are identical except for their location relative to the waterfront (hedonic property values).

Valuation of Human Life

If putting a price tag to the environment is difficult, determining the monetary value of a human life is even trickier: If increased pollution would produce produce a one-in-a-million increase in the risk of cancer among the exposed population, and there is a population of 5 million in the area surrounding the factory, how much money would be reasonable to spend in order to prevent those five potential deaths? The value of a human life has been estimated to be between $3 and $7 million, based on the money people are willing to pay for a reduction in risk (e.g, someone may be willing to pay $100 dollars for the vaccine for a disease with a 1 in 50,000 fatality rate.)

Present Value

It is not unusual to find out that the costs of pollution control are immediate while the benefits are spread out in time. The present value of a future benefit (or cost) X can be found by computing X/(1=r) , where r is the appropriate interest rate. This operation can be performed repeatedly for recurrent benefits or costs. Once the present value of those is known, the final stage of the CBA requires the addition and subtraction that would reveal the actual balance of the project.

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