Informing tough trade-offs

Jeff Bennett

Professor

Crawford School of Economics and Government

Overview

Markets act to convert conflicts into opportunities for mutual benefit

BUT markets are not universal AND equity issues remain as sources of conflict

Information is key to ensuring resolution of conflict in collective decision making

CBA provides the framework BUT environmental values and the treatment of employment remain challenging

MDB provides a classic case

Rules and conflict

‘You can’t always get what you want’ Rules of coordination to avoid costly ‘tantrums’ in

families and economies Exchange of property rights:• External institutions (contract law, property law etc)• Internal institutions (honesty, trust etc)

‘Tantrums’ converted to mutually advantageous gains from trade

Gaps

Initial allocation of rights can be disputed: • ‘It’s not fair’

Transaction costs are high enough to preclude the formation of markets:• No motivation for supply• Buyers won’t act without security of title

Fillers

Collective alternative to decentralised market Imposition of external institutions beyond the

definition and defence of property rights Equity:• Proportional taxation• Social security

Missing markets – eg the environment:• Direct or subsidised provision

Conflict possibilities

Access to resources via the collective decision making process (politics)

Rent-seeking ‘squeaky wheels’ ie tantrums Transparency in decision making is advisable INFORMATION + well-educated populace + free

press + responsive democratic processes

Conceptual framework

Cost-Benefit Analysis: framework for assembling information for decision makers

Merits of a change assessed relative to the ‘counter-factual’

Utilitarian, anthropocentric approach based in welfare economics principles

Social impacts

All CBA elements are ‘social’ ‘Socio-economic’ is a tautology Social impacts taken to be further consequences of

changes in producer and consumer surplus changes• regional service provision• Mental health impacts

Need to avoid double counting

Employment

In CBA:• Employment of labour and other resources is an

(opportunity) cost• If a change involves fewer resources being used …

allows resources to be freed for other uses and so results in a benefit

In social impact assessment• Reduced employment is a cost to society• People who are put out of work are left without income

and suffer loss of self-esteem, depression etc

A critique

Reduced employment is a benefit only if resources are fully employed and adjustment is costless

If unemployment• No offsetting benefit of alternative use so reduce the

benefit by the probability of unemployment If adjustment costs:• Reduce benefit by the costs of adjustment

Social cost of unemployment?• Non-market value

Environmental impacts

Missing markets induce rent seeking Information requirements:• Predictions of bio-physical impacts of change relative to

counterfactual• Values held by people for those impacts

Safe Minimum Standard approach relies on achieving set levels of the biophysical impacts• Potential for a clash of ‘musts’• Revert to trade-off under ‘intolerable cost’ clause

Weighing up trade-offs

CBA requires estimates of all values Non-market valuation techniques:• Revealed preference methods• Stated preference techniques

Consistent with welfare economics Other methods are problematic:• Costs of achieving environmental goals – estimating

benefits with costs?• Replacement cost; averting costs

Conclusions

Markets offer conflict resolution process but are not ubiquitous and are based on a specific wealth distribution

Collective decision making requires information to avoid rent seeking

CBA provides framework but application BUT application requires ‘caveat emptor’

Alternative: market testing of demand?

For more information:

http://www.crawford.anu.edu.au/staff/jbennett.php Environmental Economics Research Hub:

http://www.crawford.anu.edu.au/research_units/eerh/index.php