In two previous contributions to this site (part I and part II), I argued that important lessons about environmental decision-making can be obtained from the experience of central planners in eastern Europe. In this posting, I continue this thread by considering the difficulties of determining HOW goods are to be produced; and by arguing that these difficulties have important implications for the relevance of cost-benefit analysis to environmental decision-making.
When discussing the question of WHAT to produce, in my previous posting, I argued that consumers can only make informed decisions about the set of goods and services they prefer if they know the opportunity costs of those decisions. Consumers can only make meaningful decisions about the number of pairs of shoes they would like, for example, if they know what the “other” goods are that they are foregoing. Does a pair of shoes “cost” a box of cereal, a monthly bus pass, or a new radio? Similarly, they can only make informed decisions about the number of spotted owls they are prepared to save if they know what other goods have to be given up.
This requires that planners first develop a complete set of techniques for producing the desired goods, including a list of the goods that will have to be foregone if production occurs. When consumers are presented with this set of techniques – HOW production might occur – and the associated opportunities foregone, they can select the technique that requires that they give up the goods and services with the lowest value.
For example, assume that consumers have been asked to choose between bakery-made and factory-made bread. If there is a shortage of manufacturing equipment in the country, and an abundance of labor, consumers might prefer that bread be made in bakeries. Manufacturing equipment could then be directed to the production of goods that cannot easily be made by hand – such as automobiles. Similarly, in such a country, consumers might prefer that their clothes be washed by hand, rather than by machine.
In all such cases, however, recognition that each good can be produced by a number of alternative processes complicates the planner’s decision significantly. If there is only one production technique, the planner can ask consumers whether they would like more of a good, given that, say, the required labor could be taken from the production one of, say, four alternative products. When there are multiple production techniques, however, the number of possible alternatives from which labor (and other inputs) can be drawn increases by that multiple.
This compounding of complexity is of particular concern to environmental decision-makers, as there are often numerous alternative methods of producing each possible environmental amenity. Thus, if decision-makers are to determine what consumers’ preferences are for the optimal level of an amenity, consumers will have to be informed about the impacts of each of the alternative methods of production.
For example, it might be possible to achieve a particular improvement in salmon survival rates using a number of alternative changes to agricultural practices - each of which could have a different effect on other threatened species – or by breaching various combinations of dams on a number of alternative rivers – in each case altering the quality of drinking water and the habitats of a number of other species. A complete analysis of social preferences would require that voters be informed about the effects that each of these alternative techniques had on each of the affected species, at each possible level of salmon protection. This compounding of complexity places ever-greater demands on the selection of the decision-making process.
Importantly, as this complexity increases, the argument for the use of cost-benefit analysis as a tool of environmental decision-making weakens. If there are numerous alternative methods of achieving any given level of environmental amenities, and numerous alternative levels of such amenities, it no longer becomes sufficient to ask whether the benefit of one method of reaching one level of amenity exceeds the cost. Rather, if government agencies wish to find the optimal environmental policy, they must conduct cost-benefit analyses of every combination of techniques and output levels in order to find the one with the greatest ratio of benefits to costs. In all but the simplest cases, I would argue, the cost and difficulty of conducting these analyses quickly reaches a point at which alternative decision-making processes begin to become attractive.
