Question

Please answer questions related to the economics of high speed rail.

a Why is it difficult to estimate environmental costs and benefits and why is it particularly difficult to estimate environmental costs and benefits into the future?

b How is marginal analysis different from analysis that uses averages and why do economists prefer marginal analysis to the use of averages?

c What role does emotion and personal beliefs play in the economic calculation of benefits and costs and do you believe that emotion and personal beliefs enter the calculations of costs and benefits of economists?

Answer 1

a. Estimation of environmental costs and benefits is difficult mostly due to the fact that they are not quantifiable and subject to diverse interpretations. The cost of a deforested area is higher for a tribe residing in that area than an industry put in place of the land primarily due to the fact that it is displacing the tribe's residence and livelihood. Similarly, the benefit of preserving a bird sanctuary is greater to the tourism department of that region than to a factory that was planning a plant set up in that region. Thus, costs and benefits associated with the environment are hard to estimate accurately and their accuracy itself is open to confusion between different segments.

While pertaining the future estimation of environmental costs and benefits, it is even more difficult to do so due to the dynamic changes happening and the long term associated between the estimates and the actual results. An environmental damage may affect the health of the citizens, resources or productivity overtime, similarly, the environmental cost or benefit associated to a project may change due to changes in financial parameters of inflation or currency. Such uncertainty about the future makes it even harder to calculate the true environmental value.

b. Marginal analysis is the estimation of the additional benefits over costs attained on execution of a project or an activity such as sale or production of another unit. The costs attributable to the next activity should avail enough benefits so as to offset and provide additional margin. On the other hand, average analysis uses the result of the entire output as a whole to understand the current position of the business. It doesn't take into account the dynamism of decisions and the individual benefits of performing an activity. Hence, economists aim to ascertain the value added at each step of activity, that is possible through a marginal analysis of the task than an average analysis that provides an end metric rather than a continuous flow of information.

c. While making cost-benefits calculations, emotions and morals provide the grounding needed to ensure social aspects are taken into consideration. Decisions made just on the objective of earning profit at the cost of harm to an environment or community are devoid of morality. Emotions and personal judgement plays a role in such economic calculations. For example, a project on creation of a dam that threatens the existence of an endangered aquatic species will likely be monitored carefully and the organization proposing this project may revise its costs upwards to protect the species due to the involvement of emotions.

Costs and benefits in economics are highly influenced by emotions and beliefs. Thus, contrary to the assumption of rational players in the market, individuals use their morals, backgrounds and emotions while making economic decisions.