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On non-marginal cost-benefit analysis

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  • Dietz, Simon
  • Hepburn, Cameron

Abstract

Conventional cost-benefit analysis incorporates the normally reasonable assumption that the policy or project under examination is marginal in the sense that it will not significantly change relative prices. In particular, it is assumed that the policy or project does not change the underlying growth rate of the economy. However, these assumptions may be inappropriate in some important circumstances, such as large development projects in small economies, or large-scale infrastructure investment programmes. This paper develops the theory on the evaluation of non-marginal policies and projects, with an empirical application to the mitigation of global climate change. We examine the conditions under which evaluation of a non-marginal project using marginal methods may be both qualitatively and quantitatively wrong, and explore the magnitude of the potential error using a commonly employed integrated assessment model of climate change.

Suggested Citation

  • Dietz, Simon & Hepburn, Cameron, 2010. "On non-marginal cost-benefit analysis," LSE Research Online Documents on Economics 37591, London School of Economics and Political Science, LSE Library.
    • Handle: RePEc:ehl:lserod:37591
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    File URL: http://eprints.lse.ac.uk/37591/
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    Cited by:

    1. David Hendry, 2010. "Climate Change: Lessons for our Future from the Distant Past," Economics Series Working Papers 485, University of Oxford, Department of Economics.
    2. Megan Ceronsky & David Anthoff & Cameron Hepburn & Richard S.J. Tol, 2005. "Checking The Price Tag On Catastrophe: The Social Cost Of Carbon Under Non-Linear Climate Response," Working Papers FNU-87, Research unit Sustainability and Global Change, Hamburg University, revised Aug 2005.
    3. Cameron Hepburn & Benito Müller, 2010. "International Air Travel and Greenhouse Gas Emissions: A Proposal for an Adaptation Levy1," The World Economy, Wiley Blackwell, vol. 33(6), pages 830-849, June.
    4. Ian Bateman & Georgina Mace & Carlo Fezzi & Giles Atkinson & Kerry Turner, 2011. "Economic Analysis for Ecosystem Service Assessments," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 48(2), pages 177-218, February.
    5. Koen Vermeylen, 2013. "Non-Marginal Cost-Benefit Analysis and the Tyranny of Discounting," Tinbergen Institute Discussion Papers 13-203/VI, Tinbergen Institute.

    More about this item

    Keywords

    Cost-benefit analysis; non-marginal; project appraisal; discount rate; infrastructure investment; climate change; hydropower dam;
    All these keywords.

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate
    • Q54 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Climate; Natural Disasters and their Management; Global Warming

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