Judgement and cost-benefit analysis

16/09/2013 § 2 Comments

The proposed changes to the Resource Management Act have the potential to increase the use of cost-benefit analysis in RMA applications and decisions. New Zealand uses the RMA to find a balance between economic claims on resources and other claims, especially environmental and social.

The results are controversial. One area of controversy is the extent to which CBA should inform decision. How important is it? Can we trust it?

My colleagues at NZIER wrote a discussion paper earlier this year on these issues. They suggested that we need better information to support more consistent decisions. They pointed out that methods do exist for understanding the value that people place on the environment. We need to apply them, however, and that takes money.

Parenthetically, I’ll note that this should be better funded by the public good science funds. Major decisions keep being made without good data, because it is never cost-effective to collect the data in any single case. It is a collective action problem, which is why we have a government.

Two lawyers, Christensen and Baker-Galloway, have written in Resources Management Journal  an article that reviews the decisions and the legal reasoning behind them. The article mainly puts some legal context around the economists’ contention that we could and should do more with non-market valuation.

One message that comes through in the cases reviewed is that judges are reserving the prerogative to judge. The talk of ‘flexible’ and ‘holistic’ decisions is in part cover for judicial discretion. This isn’t necessarily wrong on the surface. The issue is that we do have ways to include better information. If that narrows the field of discretion, so be it — it would be a net gain for society.

Specifically, Christensen and Baker-Galloway discuss the High Court decision in Meridian Energy Ltd v Central Otago District Council, in which the High Court overturned the Environmental Court decision. The article quotes the decision:

Parliament has not mandated that the decisions of consent authorities should be “objectified” by some kind of quantification process. Nor does it disparage, as a lesser means of decision-making, the need for duly authorised decision-makers to reach decisions which are ultimately an evaluation of the merits of the proposal against relevant provisions of policy statements and plans and the criteria arrayed in Part 2. That process cannot be criticised as “subjective”.

The point of having decision-makers is to make decisions. If you take away the discretion, what are they going to do?

In a 1998 article by David Pearce, an expert in CBA, I found the following:

…perhaps a cynical interpretation, CBA tends to present results in a reasonably cut and dried manner, subject to the uncertainty of the estimates. Benefits exceed or do not exceed costs. But decision-makers may place as much importance on flexibility of decision. A CBA that, in effect, removes that flexibility will not be welcome.

New Zealand case law seems to support that view.

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§ 2 Responses to Judgement and cost-benefit analysis

  • detmackey says:

    I’ll note that this should be better funded by the public good science funds.

    Yes! Much closer to a public good than the industry-specific R&D I quibbled with you previously. And almost inarguably more likely to lead to returns on the investment.

    I think it was NZIER who did some revealed preference work for one of my previous employers. Despite it’s caveats, it’s infinitely better than no information or opinion. I can’t understand why it’s not employed more. I remember it being that costly, and don’t remember it being restricted in anyway (OIA-able anyway).what the restrictions there were on sharing it.

    There are plenty of people like me with economics backgrounds working in these kinds of areas who can work with this information if not construct it. And there’s a fledgling body to solve these kinds of coordination issues in the Government Economics Network, so why hasn’t this happened already?

  • detmackey says:

    *can’t remember it being that costly.

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