Here is a recent example of the classic jobs versus environmental quality tradeoff that environmental economists are very familiar with. It also allows an example of a benefit-cost analysis.
A utility would like to site a coal-fired power plant in a depressed area in Florida:
The plant, which is being proposed by several public utilities, would bring 150 permanent jobs to the area and 1,500 jobs during construction. At an estimated cost of $1.4 billion, county officials are looking at the potential tax revenue from the plant that would be used to fund improvements to roads and schools. Local businesses also would benefit from the influx of money and people.
But the promise of jobs to an employment-starved county has not clouded everyone's vision on the other potential deposit of the coal plant - pollution.
Some longtime residents, both the poor and the well-off, still have strong feelings about preserving Taylor's environment and are not willing to sacrifice health concerns for economic prosperity. Others are skeptical about the promised jobs being filled by Taylor residents.
How should the community decide whether to allow construction? The role for an economist is to provide a benefit cost analysis.
-- Warning: Back-of-the-envelope analysis ahead --
The primary costs of the plant are the "external costs" of pollution (e.g., negative health effects that occur outside a market transaction, negative impacts to agriculture, tourism, etc). The benefits of the plant include the profit earned by the plant (i.e., "producer surplus" to an economist), tax revenue, etc.
Both of these numbers can be monetized using various economic methods. I'm sure more on these methods will be posted on env-econ in the future.
An estimate of the benefits of the policy is $3.75 million annually. An estimate of the total cost is about $1.33 million annually. The annual net benefits are about $2.42 million ($2005). Therefore, the environmental economist would conclude that siting the plant is a good idea (i.e., it improves economic efficiency). This information is advisory. Politicians and other decision makers are free to make whatever decision they'd like.
Follow the link below for the gory numerical details.
Back-of-the-envelope benefit cost analysis
Here is a very simple benefit cost analysis (i.e., "back of the envelope"). I'm ignoring construction and numerous other costs (such as agricultural and other pollution costs) and the benefits to consumers from lower energy prices, tax revenues and other benefits.
The profit can be reasonably proxied by the increased income from new jobs. Given the following information:
- The plant would bring about 150 jobs with an average salary of $25,000.
- (Taylor, Fl has about 20,000 residents with per capital personal income < $20,000.)
The increased income (i.e., benefits) is $3.75 million annually.
The health costs are estimated by piecing information together from various sources. From a another siting case study in Michigan (Coal Burning Plant Fires Up Hot Dispute in Manistee):
According to the Union of Concerned Scientists in Washington, D.C., a similar-size, 500 megawatt plant typically pours into the atmosphere 10,000 tons of sulfur dioxide, which causes acid rain, 10,200 tons of nitrogen oxide that leads to smog, 700 tons of carbon monoxide, which aggravates heart disease, ...
(Annually, right?) More semi-educated guesswork, I assume that the quantity of fine particulates generated is about 5% of the tons of SO2 and NOX (readers: please offer better suggestions).
In a study of the external health costs of coal-fired electricity generation, Bill Desvousges, Reed Johnson and Spencer Banzhaf (Amazon.com link) estimate that the costs per ton of coal-fired power plant pollution in a rural area are ($2005):
- $902/ton for fine particulates
- $59/ton for nitrogen oxide
- $28/ton for sulfur dioxide
- $0.39/ton for carbon monoxide
Next, I multiply the costs per ton by the number of tons generated annually. The total cost is about $1.33 million annually.
Subtracting costs from benefits the annual net benefits to the town of Taylor are $3.75 - $1.33 = $2.42 million.
Comments, criticism, corrections and character assasination are very welcome.
