8.4.1 Cost-Effectiveness Analysis
Rather than quantifying benefits in money terms, this method, concentrates on
meeting or satisfying a pre-set objective or standard.
When insufficient funds or data are available, or if there is inadequate knowledge
necessary to establish the connection between human health and welfare and environmental damage, it may sometimes be more useful first to fix a goal, followed by
an analysis of different methods of reaching that goal.
Cost-effectiveness analysis is also suitable for social programs related to health
and population as well as for the analysis of environmental impacts. Generally, it is
useful for all projects where benefits are not easy to determine in monetary terms.
Cost-effectiveness analysis starts by setting a target, such as an effluent standard
for industrial facilities, a threshold exposure level to a airborne disease vector or a
given ambient quality. The policy-maker must compare the potential trade-offs
among different standards and the costs required to achieve them. The economic
principle usually applied to such a decision is to equate marginal benefits with
marginal costs whereby standards are gradually improved until the additional costs
of further standard improvement are slightly less than the additional benefits obtainable from improving the standard. However, when it is not easy or possible to
quantify benefits or put them in money terms, this method becomes mainly
conceptual.
Although cost-effectiveness analysis appears to be a simple economic or engineering approach, there is, in practice, a wide scope for further analysis. The
following example explains one of the main reasons for this, namely, that alternative
strategies may achieve different levels of control.
Assume that the government has set an emission standard not to exceed 100 ppm.
An industry can choose from three available technologies A, B and C. Table 8.2
provides the characteristics for each technology.
Only technology A satisfies the set standard; technology B may be cheaper to
install, but is certainly inadequate. Technology C presents a problem: though it is
much cheaper than (only half as much) than technology A, yet, it falls short of the
target by only a small amount.
Which technology should be recommended?
A strict application of the regulation would be to adopt technology A.
However, adopting technology C would save Rs.12 million. Is the slight increase
in emissions justified by the savings?
In a cost-effectiveness analysis, these alternative possibilities should be presented
to the decision-maker, together with the arguments from both the economic and
Table 8.2 Characteristics for
technologies considered
Technology
Installation Cost
(Rs. million)
Emission Level
(ppm)
A
2 5
9 9
B
18
125
C
13
104
226
8 Analysis of Environmental Impacts of Infrastructure
Rather than quantifying benefits in money terms, this method, concentrates on
meeting or satisfying a pre-set objective or standard.
When insufficient funds or data are available, or if there is inadequate knowledge
necessary to establish the connection between human health and welfare and environmental damage, it may sometimes be more useful first to fix a goal, followed by
an analysis of different methods of reaching that goal.
Cost-effectiveness analysis is also suitable for social programs related to health
and population as well as for the analysis of environmental impacts. Generally, it is
useful for all projects where benefits are not easy to determine in monetary terms.
Cost-effectiveness analysis starts by setting a target, such as an effluent standard
for industrial facilities, a threshold exposure level to a airborne disease vector or a
given ambient quality. The policy-maker must compare the potential trade-offs
among different standards and the costs required to achieve them. The economic
principle usually applied to such a decision is to equate marginal benefits with
marginal costs whereby standards are gradually improved until the additional costs
of further standard improvement are slightly less than the additional benefits obtainable from improving the standard. However, when it is not easy or possible to
quantify benefits or put them in money terms, this method becomes mainly
conceptual.
Although cost-effectiveness analysis appears to be a simple economic or engineering approach, there is, in practice, a wide scope for further analysis. The
following example explains one of the main reasons for this, namely, that alternative
strategies may achieve different levels of control.
Assume that the government has set an emission standard not to exceed 100 ppm.
An industry can choose from three available technologies A, B and C. Table 8.2
provides the characteristics for each technology.
Only technology A satisfies the set standard; technology B may be cheaper to
install, but is certainly inadequate. Technology C presents a problem: though it is
much cheaper than (only half as much) than technology A, yet, it falls short of the
target by only a small amount.
Which technology should be recommended?
A strict application of the regulation would be to adopt technology A.
However, adopting technology C would save Rs.12 million. Is the slight increase
in emissions justified by the savings?
In a cost-effectiveness analysis, these alternative possibilities should be presented
to the decision-maker, together with the arguments from both the economic and
Table 8.2 Characteristics for
technologies considered
Technology
Installation Cost
(Rs. million)
Emission Level
(ppm)
A
2 5
9 9
B
18
125
C
13
104
226
8 Analysis of Environmental Impacts of Infrastructure