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:  Environmental Economics Research Hub: h/index.php