Question

1. Should decisions about natural resource policy be made based on cost benefit analysis?

Answer 1

Yes, certainly. To understand this question let us first understand what is cost-benefit analysis:

Externality occurs when people who were not a part of decision making get affected. Example: Allowing factory set up in an area may impact local community positively and negatively.

Social benefits are a sum of private benefits and external benefits. Similarly, Social costs are a sum of private costs and external costs.

Let us take an example of a company which wants to set up a solar power plant.

In this case solar panels will have more social benefits.

Private benefits: a. Uninturpted power supply to school.

b. No pollution in school premises and self sufficiency for school in terms of electricity.

c. No electricity bills.

External benefits: a. Jobs created for solar panel producers, fitters and after sales service professional.

b. No pollution causes society to be healthy.

c. Money saved on electricity can be used for betterment of premises.

Hence, Private benefits and external benefits are different. Social benefits is a sum of theses two.

Private costs: a. Cost of fitting and setting up a plant.

b. Maintenance costs.

c. During cloudy days, alternative energy source.

external costs: a. People losing jobs in conventional electricity plants.

Hence after due cost and benefit analysis a final decision should be taken.