Question

. Summarize the process of performing a cost-benefit analysis to determine the efficient level of pollution abatement. Identify common difficulties as well as shortcomings and positive aspects of such an analysis.

Answer 1

Cost-Benefit Analysis (CBA) estimates and totals up the equivalent money value of the benefits and costs to the community of projects to establish whether they are worthwhile. These projects may be dams and highways or can be training programs and health care systems.

One of the problems of CBA is that the computation of many components of benefits and costs is intuitively obvious but that there are others for which intuition fails to suggest methods of measurement. Therefore some basic principles are needed as a guide.

Air pollution has plagued the urban areas of our Nation for many years,both as a serious health hazard and as a costly economic burden. Users of the air as a waste disposal medium have treated it as a free resource with no regard for the damages incurred by receptors of the dirty air. Unfortunately, no self regulating market forces exist that will bring this diseconomy into an acceptable equilibrium. An outside regulating force, which can affect abatement of air pollution, is needed to achieve control of air pollution to a level acceptable to a community.

  A cost benefit analysis requires that all costs and benefits be identified and appropriately quantified. Unfortunately, human error often results in common cost benefit analysis errors such as accidentally omitting certain costs and benefits due to the inability to forecast indirect causal relationships. Additionally, the ambiguity and uncertainty involved in quantifying and assigning a monetary value to intangible items leads to an inaccurate cost benefit analysis. These two tendencies lead to inaccurate analyses, which can lead to increased risk and inefficient decision-making.

The amount of subjectivity involved when identifying, quantifying, and estimating different costs and benefits. Since some costs and benefits are non-monetary in nature, such as increases in customer and employee satisfaction, they often require one to subjectively assign a monetary value for purposes of weighing the total costs compared to overall financial benefits of a particular endeavor. This estimation and forecasting is often based on past experiences and expectations, which can often be biased. These subjective measures further result in an inaccurate and misleading cost benefit analysis.

Performing a cost benefit analysis gives you the opportunity to delve into specifics about what you are spending to launch a product or to invest in an advertising campaign. The act of defining and listing these costs is a valuable exercise, forcing you to identify and evaluate each upcoming expenditure. The process can benefit you, even though it's often impossible to fully predict every expense you will incur. Unpredictable situations and expenditures are an inevitable part of every venture,