The political economy of sustainable development valuation, distribution, governance

The Political Economy of Sustainable Development: Valuation, Distribution, Governance Dirk Jacob Wolfson Emeritus Professor of Economics, Erasmus University Rotterdam, The Netherlands.

The Political Economy of Sustainable Development

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The Political Economy

of Sustainable

Development:

Valuation, Distribution, Governance

Dirk Jacob Wolfson

Emeritus Professor of Economics, Erasmus University Rotterdam, The Netherlands

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in accordance with the Copyright, Designs and Patents Act 1988.

First published 2015 by

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Preface vii Acknowledgements viii

1.2 Economic analysis and environmental

1.4 Valuation, distribution and legitimacy 19 1.5 Short cuts: cost-effectiveness,

standards, multi-criteria and

2.2 Hedonic pricing, travel cost method

2.3 Stated preferences: contingent

2.4 Co-valuation and externalities in

2.5 Persuasion (management by speech)

2.6 Fiscal instruments for managing preference 31

vi Contents

2.7 Innovation as externality on the

2.9 Combining hard and soft information and

4.2 Interactive governance and information

4.3 Situational contracting: implementation and

4.4 Situational solutions in the valuation and

Environmental policy design provides a fascinating ing point between the natural and the social sciences, but the meeting of minds gets sometimes lost in translation This brief and interdisciplinary introduction combines theory and practice with a dual purpose: to make profes-sional practitioners aware of the way in which the tradi-tional theory of economic policy is increasingly enriched

meet-by insights from behavioural economics, theories of justice and innovations in public administration, and to provide supplemental reading for students in a wide range

of disciplines on what ecological economics and mental policy are about Its original contribution is that it develops a mechanism design for implementing Amartya Sen’s result-oriented capability theory of justice, and is grounded on the belief that legitimacy in policymaking requires an institutionalized acceptability of public inter-ventions in explicit trade-offs between rivalling criteria

environ-of good governance that balance the protection environ-of human dignity and the rule of law with social efficiency, effective-ness, sustainability and fairness

Peter Cornelisse critically read earlier drafts and gave me the benefit of his scholarship Peter Hupe, Carl Koopmans and Hans Opschoor helped out by sharing their expertise in public administration, cost-benefit analysis and ecological economics, respectively Gratefully acknowledged, moreover, are comments from unknown referees and lessons learnt from sparring with students and counterparts in consulting who warmed me up on the subject

IPCC International Panel of Climate Change

OECD Organization for Economic Cooperation and

DevelopmentWECD World Commission on Environment and

Development

Introduction

Abstract: This book is written to make the core of the

political economy of sustainability accessible to students and practitioners, in the belief that recent developments in interactive governance and behavioural economics can be helpful in dealing with the design, valuation and distributional concerns of environmental policy This first chapter explores the state of the art in environmental policy analysis In a democracy, politicians want to be advised on outcomes, on cost-effectiveness and distributional consequences, on where the dust settles after a specific intervention It closes with

a brief introduction in global economic development and ecological constraints.

Wolfson, Dirk Jacob The Political Economy of

Sustainable Development: Valuation, Distribution,

Governance Basingstoke: Palgrave Macmillan, 2015

doi: 10.1057/9781137552754.0005

 The Political Economy of Sustainable Development

1.1 About this book

Sustainable development is a grand ideal that the Brundtland Committee (WCED 1987) defines as a redirection of social development that meets the needs of the current generation, without compromising the needs of future generations Intellectually, designing for sustainability requires an interdisciplinary effort to combine results from ‘hard’, refutable ecologi-cal science exploring the biophysical aspects of environmental policy with an analysis of its social efficiency to maximize net worth in the world economy as a whole and normative visions on the valuation and distribution of policy impacts In terms of politics, the issues at hand range all the way from greening local surroundings to dealing with global warming, sea-level change and desertification in ambitious transitions in which social structures, institutions, cultural attitudes and practices are broken down and new ones are established (Loorbach 2007: 17)

In approaching these challenges, this book does not offer a grand design of a sustainable world, but concentrates primarily on the smaller steps that will get us closer to sustainability, eventually, as long as we develop sensible projects and policies To that effect, it undertakes a multi-goal policy analysis (Boardman et al 2006: 43–45), exploring not just the efficiency and effectiveness of interventions in the environment, but their valuation and distributional consequences as well, and concep-tualizes the legitimacy of public action in terms of its institutionalized acceptability It takes the biophysical findings of ecological science as given, but shows how strands of economic theory, political economy, psychology, political philosophy and public administration may be inter-woven to make environmental policy more effective and acceptable The book is written in an effort to make the core of economic reasoning more accessible to experts in other disciplines, in the belief that its method and, particularly, recent developments in behavioural economics and political economy can be helpful in dealing with the design, evaluation and distributional aspects of environmental policy

In terms of method, it is held that economic theory as such – as a descriptive and refutable science – cannot pass judgements on the ethical issues involved in safeguarding sustainability Chapter 3, however, goes into the leading visions of justice in political philosophy and Chapter

4 shows how a mechanism design of situational contracting in public administration can reveal how the governance of environmental chal-

lenges actually deals with the normative valuations and distributional

is meanwhile gradually rolled out to deal with information problems in general (Wolfson 2012 and 2015).

Section 1.2 of this chapter briefly summarizes what non-economist need to know and economists should remember about the way in which economic theory analyses choices made between environmental and other desiderata, in an effort to contribute to an efficient use of scarce resources, such as time, money, or inputs in kind Scarcity and

efficiency are the core concepts of economic theory, or ‘economics’: in

paradise, there is no need for economics or economists In real life, however, scarcity calls for efficiency, but efficiency rivals with other

is criteria of good governance such as fairness and sustainability The section begins with the role that an ideal system of ‘perfect’ markets might play in the coordination of the use of scarce resources, but ends with an impression of the origins of market failure as a possible agenda for public action

Section 1.3 explores the state of the art in traditional cost-benefit analysis for evaluating policies and projects with the intent to deal with market failure, and introduces the gaps that need further work Section 1.4, for instance, argues that cost-benefit analysis should not stop at putting a price on environmental values that are overlooked

as external economies and diseconomies or incomplete property rights

in market coordination (Baumol and Oates 1988: 26) It should also reveal how total costs and benefit are distributed over (groups of) citizens, since fairness in distribution is a necessary condition for acceptability by the people affected Section 1.5, however, holds an early warning to leave well-enough alone, and offers short cuts in case a full

 The Political Economy of Sustainable Development

cost-benefits analysis is not necessary or feasible Furthermore, it qualifies the relevance of the ‘ideal’ world as introduced in Section 1.2

in which ‘perfect’ competition would create perfect markets, yielding prices as reliable indicators of scarcities In real life, competition is imperfect, not just because externalities are overlooked, but also when entrepreneurs have scope to behave as ‘rent seekers’, driving up profit

margins Section 1.6 introduces the carrying capacity or environmental

utilization space as an ecological constraint on economic development

It cautions, moreover, that while in developed economies cost-benefit analysis is well-grounded on a local and national scale, most of the big ecological issues, such as global warming, water management and desertification require a closely monitored global governance, a prob-lem that will be further developed in Section 4.4

Chapter 2 elaborates in nine sections on how sustainable solutions may be valued without attributing results to individual beneficiaries, on the basis of a wide range of solutions, starting circumstantial evidence of consumer preference derived from the actual functioning of economic systems, and gradually moving towards top-down management by speech and imposition of ‘planners’ preferences’

Chapter 3 briefly introduces the basic descriptive concepts of uting costs and benefits across individuals and social groups in fiscal solutions and distributional weights before ending, in Section 3.4, with

distrib-an introduction to the leading normative visions of justice in political philosophy, concentrating on the seminal contributions of John Rawls (1971; 2001 and 2005) and Amartya Sen (1973; 1985; 1999 and 2009).Chapter 4 starts out, in Section 4.1, with casting cost-benefit-analysis

in the procedural mould of public administration Section 4.2 makes a general plea to manage the information needed in today’s complex proc-esses of governance in a properly incentivized and interactive style of decision-making To that effect, Section 4.3 breaks new ground by intro-ducing the situational contract as a way of bringing demand and supply together in reciprocity, bonding and accountability, and to induce politi-cians to be explicit on actions to be taken, nationally and internationally Within that broader perspective, Section 4.4 explains the relevance of

the situational contract in implementing Sen’s Idea of Justice (2009) in the

valuation and framing of distributive concerns in environmental policy,

and to commit partners in implementation In Section 4.5, the book concludes that, although economic analysis cannot judge the fairness of

solutions, the proposed mechanism design of situational contracting can

Introduction

reveal the prevailing notions of fairness and confront politicians with

their responsibility to order values for society, as a crucial condition for collaborative governance (Emerson et al 2012: 17)

1.2 Economic analysis of environmental policy:

scope and limits

The mainstream in the economic way of thinking starts out from an

imaginary system of perfect markets as an ideal state for establishing value

and dealing with scarcity, efficiency (least-cost solutions) and ness (optimal results) in the use of resources Markets are ‘perfect’

effective-when (1) all scarcities throughout the economy are priced, and operate

as compatible incentives, (2) competition can be relied upon to drive out

economic power, (3) economic actors are, on the whole, capable of

valuing and ordering their preferences, (4) transactions are excludable,

meaning no pay, no deal for parties that are not able or willing to deliver

(Shleifer 1998), and (5) the scale of supply is adjustable or divisible to

match with demand (more about non-excludability and indivisibility in the discussion of Figure 1.1, later in this section)

Costs are seen as opportunity costs that express the benefits or

oppor-tunities forgone by spending scarce resources such as money or tise on private goods and services or public programmes and projects considered Scarcity and opportunity costing are the core concepts of economic analysis In short, economic theory explores how people deal with scarcity in pursuing their objectives, against a background of a hopefully comprehensive set of ‘perfect’ markets as a socially efficient counterfactual or conceptual measuring rod of economic performance

exper-In an ideal state of perfect markets and opportunity costing, markets

are supposed to clear demand and supply at the point where the marginal

benefit of an additional unit demanded equals its additional or marginal

costs Demand and supply are recognized to be sensitive (‘elastic’)

or insensitive (‘inelastic’) in its response to (changes in) prices Note, however, that markets do not make decisions, people do A leading theme

in behavioural economics and in Chapter 4 of this book is that it’s not

markets or hierarchies, but individuals that have objectives and make

decisions, on their own account, or in the name of households, firms or other entities and institutions (Leibenstein 1980: 3), and that policymak-

ers better take that into account Markets and hierarchies just provide

 The Political Economy of Sustainable Development

information on relative scarcities, as an input in decisions that individuals

make in the use or resources (Burkhead and Miner 1971: 13) Similarly, in situations where markets are ‘missing’ (as in case of an incomplete cover-age of scarce environmental values), actors in government or voluntary non-governmental associations (‘NGO’s) are supposed to extend fiscal interventions (taxes, charges and expenditure) to the point where marginal social benefits equal the burden of taxation and voluntary contributions, or resort to regulation This way, a comprehensive system

of perfect markets and supplementary governance would generate an

ideal state of general equilibrium between demand and supply,

through-out the economy, presuming that where markets fail and governments

or voluntary associations step in, costs and benefits are equated at the margin as well

In short, general equilibrium denotes an optimal or best-achievable

state of efficiency of the economic system here and now, but not sarily its fairness in distribution, nor its sustainability over time, as it

neces-only reveals the preferences of present generations Hence the need for political decisions to be specific about the way in which possibly endangered social values regarding fairness and sustainability are to be dealt with

In terms of behavioural assumptions, traditional economics views people as ‘self-interested’ and ‘rational’, two hypotheses that have been

further developed over time Nowadays, rationality is still understood

as the capacity to order one’s preferences, but with room for wide range of motivations such as altruism and commitment as well, in an emerging field of ‘behavioural economics’ (Kahneman 2003; Cartwright

2011) Rationality then refers to the quality of method in a process of

appropriate deliberation, rather than perfection in outcome: owing to chance, good method may not always lead to good result (Hirschleifer

1985: 59) Appropriateness here implies that people also take the cost of

deliberation into consideration With reference to the fable of the mule that starves between two stacks of hay because he cannot decide where

to start eating, economists would consider the poor animal irrational With regard to the efficiency of deliberation, Simon (1976; 1979) intro-

duced the notion of satisficing behaviour, in which rational people may

leave well-enough alone and follow routines in ‘bounded rationality’ to

economize on transaction costs Transaction costs include the ex-ante

search costs of finding partners to deal with, the cost of negotiating and safeguarding an agreement, and the ex post costs of maladaptation and

from states, but rather from changes in states Most of us mind a loss in

well-being more than enjoy a gain of a similar size and quality (Rabin 1998: 20; Kahneman 2003: 1454–1456) This ‘endowment effect’ means that people mind a loss of natural habitat, e.g., more than they appreciate

a compensating effort in conservation

What still stands of the predominant paradigm of ‘mainstream’ or

‘neo-classical’ economics is a penchant for subjectivism in looking for

the key to individual utility or satisfaction The primary focus is on what individual people want, as presumably ‘sovereign’ consumers in markets and citizens in democracies In this perspective, politicians who want to impose preferences for ‘merit goods’ – goods and services that they consider undervalued by the public – have explaining to do, in an accountability that will be a leading theme in this book

Recall, moreover, that we are still dealing here with an imaginary system

of perfect markets as a conceptual edifice to structure our thoughts In real life, of course, markets are far from perfect, but the notions and tools described above allow us to generate two important conceptual results

regarding the way an ideal economic system would work: (1) that the

additional or marginal utility or satisfaction derived from an increase

in goods or services tends to decline when people get more of the same, and (2) the assumption that people try to equalize the marginal utilities derived from the various items they spend their resources on, individu-ally or collectively; two basic planks of economics known as Gossen’s First and Second Law (Blaug 1978: 315–322) The First Law, of a declining marginal utility, is – by and large – supported by empirical evidence; the Second Law is a plausible assumption, and together they show the way

to what economists call a Pareto-efficient or optimal use of resources, or

an optimal allocation: the state in which the efficiency of an economic

system reaches its best-achievable or optimal point, where it is no longer possible for a policy change to make someone better off without making

 The Political Economy of Sustainable Development

somebody else’s position worse off (In economics, ‘laws’ describe nent and explainable tendencies that may allow for contextual excep-tions: Gossen’s Law of declining marginal utility, for instance, may not apply for obtaining a collector’s item that makes a set complete)

perti-The ‘Pareto-criterion’ highlights again the focus of economics, as a descriptive and refutable science, on analysing how people deal with scarcity and efficiency It indicates the size of a welfare gain that may be

achieved by a public intervention as the potential to make the ‘winners’

compensate the ‘losers’, but it does not qualify as a prescriptive ethical norm regarding the distributional consequences of public action What

is sometimes overlooked, for instance, is that the focus on the Pareto criterion tends to favour the status quo, because the range of choices that represent Pareto improvements starts out from an initial distribution of income or wealth From a policy point of view, however, changes in taxa-

tion or public expenditure may make some people intentionally worse

off Hence, as Hennipman (1995: 67) points out, the criterion should not

be interpreted as a value-loaded criterion specifying ‘what ought to be achieved’ in terms of fairness, but as a technical observation of ‘what is

actually achieved’ in terms of efficiency Hennipman emphasizes that the criterion is no more than ‘a neutral analytical tool performing a descrip-tive and not a prescriptive function’

What matters is that, in a democracy, politicians are not just ested in ‘neutral’, descriptive science to help achieve efficiency; they also entertain more normative interpretations of fairness, want to be advised

inter-on the presumable acceptability of policy outcomes in general and, particularly, on where the dust settles after a specific public intervention Hence, policy analysis has to cover a wide range of normative criteria of good governance, including the protection of human dignity, individual freedom and the rule of law, and fairness in distribution, efficiency, effectiveness and sustainability In dealing with all this, we cross the line

between refutable insights on efficiency in economic theory or

‘econom-ics’ and the balancing act of dealing with other desiderata, in a more

normative practice of ‘political economy’ While economics can provide

a refutable or value-free analysis of what happens if we do something, political economy, or the theory of economic policy, turns the issue around and explores what we should do, if we want things to happen, in an ‘inver-

sion of logic’ (Tinbergen 1956: 9) It puts normative preferences up front, and takes it from there Suppose, for instance, that we want to improve the efficiency of market coordination within constraints of particular

Introduction

distributional outcomes, then we have to ‘mix’ refutable analysis with essentially normative goals in a multi-goal analysis In terms of method, therefore, this book follows the distinction made by Robbins (1976: 3),

who has defined economics as ‘a collection of value-free generalizations about the way in which economic systems work’, and political economy

as ‘prescription rather than description; although, since it is concerned with practice, its recommendations make use of what aspires to be a scientific examination of the results of action, rather than wishful think-ing regardless of consequences’

In short, political economy provides systems for ordering values in

society, in all respects where markets are considered (1) to fail in covering

scarcities, (2) don’t generate the best or the fullest possible use of resources,

or (3) outcomes are considered unfair In order to find the best possible use, the most important exploratory tool in economic policy is cost- benefit analysis, a technique that helps to identify the ‘net social surplus’

of policy interventions in rationalizing deductions from abstract policy models, as explored in the next section The reliability of cost-benefit analysis, however, crucially depends on the quality of the information it manages to generate on the preferences, valuations and incentives at play

in the demand and supply of public policies (Simon 1979) To improve the quality of information used in policy analysis, Chapter 4 pleads an interactive style of policy making and introduces a mechanism design

of situational contracting that (1) reveals political preferences in trades

between efficiency, effectiveness and fairness, (2) induces a ment of partners in delivery to collaborate – to pay or to perform – and (3) aligns the incentives of the actors involved

commit-Mechanism designs were introduced in Section 1.1 as normative

configurations providing the architecture and the compatible incentives

of result-oriented policies In dealing with sustainable development, the crucial question a mechanism design has to answer is to what extent

we can rely on markets, and where governments or non-governmental organizations (NGO’s) have to step in to deal with environmental scarci-ties in terms of (1) pricing and incentivation, (2) constraining economic power, (3) ordering of preferences, (4) excludability and (5) adjustability

of scale in the match between supply and demand: the Big Five issues listed in the opening paragraph of this section, and the ensuing distribu-tive concerns

Figure 1.1 gives an impression of the origins of market failure in

deliv-ering environmental sustainability, in terms of a refutable analysis of

 The Political Economy of Sustainable Development

technical imperfections in delivering the ‘best’ and the ‘fullest possible’ use

of resources and normative visions of immanent limitations in delivering

a fair and appropriate use, a crucial distinction in development strategy,

generally (Wolfson 1979: 7–19) Technical imperfections become

appar-ent when markets fail to put a price on an unsustainable use of resources

or, more generally, leave environmental values out of the calculus of

costs and benefits as ‘external effects’ or externalities, for short Chapter

2 gives pointers of how to promote wanted or ‘good’ externalities and to recognize and reject ‘bad’ ones, but then the question of implementation arises: how do we make those value judgements stick, and what are their consequences?

In Figure 1.1, the technical characteristics ‘excludability’, ibility of scale’ and ‘(non)rivalry of demand’ provide clues for choosing between market transactions and non-market coordination Problems of individual non-exclusion – the locus of an environmental ‘good’ or ‘bad’

‘indivis-in the upper range of the left-hand column – turn out to be the major

figure 1.1 Imperfections and limitations of market transactions: options for

2 (pure) public bad

(tragedy of the commons)

Individual exclusion

3a indirect market good

4a typical market good

(shelter and food)

Introduction

culprits, but matters of scale play a role as well The sanction of exclusion and, hence, of an individually enforceable quid pro quo is of strategic

importance, as it generates reliable information on prices as indicators

of scarcity and willingness (or ability) to pay, to perform or to accept in

matching demand and supply

Cell 1 of the matrix denotes the case of protection against a rising level Once a large-scale coastal defence system is built, it is all or nothing,

sea-and all have open access to the benefit of the facility, since dykes come in

one indivisible piece, it is impossible to exclude the people behind it from protection Since private parties cannot be expected to have an interest in financing an open access facility for which they cannot charge individual beneficiaries, big, non-excludable and indivisible projects generally require a government to step in, and to finance solutions collectively by

taxation, as a (pure) public good With open access, the case for public action is strengthened when demand is non-rival, meaning, in the case

of coastal of people may be protected, without the safety of some being diminished by the safety of others In other words, exclusion, even where

it is possible (in Cell 3), is only socially efficient when claims have to be rationed

Cell 2 denotes the dramatic case known as the ‘tragedy of the commons’

(Hardin 1968; Ostrom 1990), where a combination of non-excludability,

open access and rival demand leads to a (pure) public bad, such as

overgrazing, overfishing or deforestation Although research, private initiative and official development aid may be helpful in mitigating envi-ronmental damage, structural solutions require governments or even the international community to establish public property rights and ways of exclusion to ‘fence’ the problem in

Cell 3 describes a situation where broadcasting rights provided for by excludable sponsors could enable markets to function in a manner that may be considered socially efficient, as may be the case of commercial radio programming (3a), which may serve a non-rival demand in open access to listeners Yet, governments may decide, for cultural or devel-opmental reasons, to offer educational programmes, weather forecasts

or other vital information for free to commercial stations (commodity prices, for instance, in order to undercut monopolies of middleman) They might even have their own radio system, providing in both cases a

quasi-public good (3b), a good that is paid for by taxation but could also

be provided in markets or, as a ‘club good’ (3c), by voluntary associations

such as NGO’s

 The Political Economy of Sustainable Development

Cell 4, finally, introduces the typical market good (4a), such as

shel-ter and food, for which rivalling demand is generally controlled by individual exclusion Here again, however, governments (4b) or NGO’s (4c) may subsidize controllable but essential services such as education and health services, or even provide open access in order to create more equal opportunities for the poor, dealing with the immanent limitations

of a market mechanism that may lose sight of fairness in its focus on an efficient use of resources

Other immanent or normative limitations of the market mechanism come to light when politicians overrule the subjectivist maxim of consumer sovereignty mentioned before They may subsidize ‘merit goods’, goods that – in their opinion – are undervalued (environmental protection, possibly), charge ‘sin taxes’ on things people should not buy (‘demerit goods’, such as cigarettes or liquor), or even use their power to provide ‘privilege goods’: inappropriate financial advantages for them-selves or their cronies (Wolfson 1979: 14), in a ‘kleptocracy’ At the end

of the day, moreover, doing something about the market’s imperfections and immanent limitations may have its downside as well, in terms of

income- and substitution effects Suppose we subsidize higher education

(creating an income effect for recipients), what if students then increase their smoking and drinking, disabling the effect of our well-intended sin taxes (a substitution effect)? Or what if income taxes raised in order to pay for scholarships or free education discourage work effort? (Economics is a dismal science!) Again, there is no free lunch, and the lunch that politicians, ultimately, will have to serve will always have an ideological taste, so we better learn about its ingredients

Note, finally, that Figure 1.1, while summarizing and clarifying options

for governance and pointers for private initiative, shows that ity, scale, rivalry in demand and immanent or normative limitations are matters of degree Option 4c, for instance, also covers cases where social control may be strong enough to make farmers share the cost of building and maintaining small-scale, fresh-water irrigation facilities, where there may be rivalling demand and the need for rationing claims amongst themselves More generally, Rabin (1998: 16) notes that behaviour may

excludabil-be induced by social goals, for instance by voluntarily reducing water use during droughts

The theory of public goods, as pioneered by Buchanan (1969), Olson (1971) and Ostrom (1990), provides important inputs in mechanism

design It reminds us that we may need more, and better organized

Introduction

transactions to improve the coverage of all scarcities, including those

that may be overlooked in traditional trading as external effects, and more excludability to reveal preferences, a better handling of indivis-ibility and scale in matching supply and demand and close scrutiny of the relation between economic power and distributive concerns, as dealt with in Chapters 3 and 4

Summing up, Figure 1.1 draws attention to a substantial agenda

of options for public intervention in securing a ‘best possible’ use of resources and fairness in access It clarifies options for the micro-man-agement of individual projects and policies, but provides no information

on ‘fullest possible’ use of resources, about the relevance of the classical presumption that markets will tend towards a full employment

neo-in general equilibrium, sneo-ince prices are supposed to drive quantities In actual practice, causality may be reversed, and economic systems may

be, as Keynes put it, ‘not self-adjusting’ On the downside of economic activity, for instance, sombre expectations about quantities may drive prices, including interest rates, too far down, as in the European ‘great’ recession following the collapse of the banking system in 2008, a macro-economic complication that will be referred to the next section, in the discussion of the discount rate in cost-benefit analysis

In closing, a final word seems in order on the taxonomy of the

tradi-tional tools or instruments with which governments try to tackle market

failure in environmental policy Governments try to improve ability with five basic categories of instruments: (1) regulation, (2) tax policies, (3) public expenditure, (4) transactions, and (5) persuasion Regulation is based on public law and democratic authorization, in response to ‘a routinized indication of citizen’s wishes’ (Lindblom 1977: 133) in which all votes count equally in addition; it constrains individual preferences, either by command and control or by regulatory taxation with a view to change behaviour Fiscal policies – taxes and public expenditure – fill gaps in what markets provide, such as compensation

sustain-or alternatives fsustain-or unsustainable behaviour, fsustain-or example by improving public transport to get people out of their car Transactions are based

on private law, voluntary exchange and excludability in case of performance They are generally associated with markets, but Chapter 4 will explore their potential in generating information about preferences and objectives of actors in public governance as well Persuasion, finally, endeavours to adapt preferences by way of deliberation or ‘management

non-by speech’

 The Political Economy of Sustainable Development

In environmental policy, the choice of instruments depends, rily, on the characteristics of the problem at hand and, particularly, on (1) the number of sources of pollution, on (2) their measurability, on (3) the opportunity cost of public intervention, and on (4) jurisdictional constraints (Wolfson and Koopmans 1997) If pollution is widely scattered and hard to measure or even to establish, as in the case of used batteries dropped in refuge containers, regulation or transaction are not feasible, but persuasion may work If people won’t get out of their car (inelastic demand), promoting hybrids or alternative options to reduce emissions

prima-in other areas may be more appropriate Fprima-inally, if prima-international eration is a necessary condition and compounded by a variety of sources and national interests, as in the case of global warming, the transaction costs of diplomacy may prove prohibitive, as will be elaborated upon in Chapter 4 That does not mean, however, that jurisdictional problems cannot be solved by good neighbourship Maintaining water quality in the Rhine, for instance, is an accepted trans-national responsibility of upstream actors in Switzerland, France and Germany vis-à-vis down-stream consumers of drinking water; it is even secured by a treaty, the diplomatic format of a successful transaction The next section shows how policies and projects to improve sustainability may be appraised in cost-benefit analysis

coop-1.3 Cost-benefit analysis: a preview

The basic function of cost-benefit analysis is to provide proxy valuations for costs and benefits that may be overlooked in market calculation, as

external effects or externalities, such as pollution of the environment

The object is four-fold: (1) to identify these effects; (2) to put a value

on them and add the results up with the items priced in markets, (3) to appraise the feasibility of alternative solutions and, finally, (4) to choose

a life span and a discount rate with which future costs and benefits of alternatives are discounted and compared in a common metric: their net present value.

In establishing the discount rate, the notion of opportunity costing comes to life again Every euro, pound or dollar spent has an alterna-tive use, in principle expressed in the structural rate of interest of the long-term government debt, nowadays largely determined by a countries reputation in international capital markets Interest rates

Introduction

may have to be adjusted for cyclical deviations and a standardized or a project-specific premium for (calculable) risk or (un-calculable) uncer-tainty, and benefits netted for the cost of scrapping on termination (for more on this, see Boardman et al 2006: 131–164 and Pearce et al 2006: chapter 13) Clearly, valuations are riddled with ifs and buts, as will be elaborated upon in Sections 1.5, 1.6 and Chapter 2

Chapter 4, moreover, will go in more detail into the governance of cost-benefit analysis and the related techniques that will be introduced

in Section 1.5 Even the most plausible outcomes, however, can never

be more than a point of departure for a sensitivity analysis to convey how vulnerable predicted net benefits are to changes in assumptions and contingencies It is a moot point, moreover, whether a standardized discount rate makes sense when the economic system proves, indeed,

not self-adjusting, as in the long recession following the collapse of the

international banking system in 2008 Interest rates that, for a long time, remain close to zero reflect a structural underutilization off resources and a window of opportunity to bring investments in a sustainable future forward – that’s what Keynes would have advised, anyway But,

as the story of the mule in the previous section told us, rationales are not always rational, especially not when politicians are afraid to lose grip on fiscal discipline In real terms, moreover, the downside of low interest rates is that costs to some are incomes to others; relief in interest rates shifts burdens to pension funds or insurance companies and their clients Like I mentioned earlier, in economics, there is no such thing as

a free lunch

In environmental policy analysis, the choice of a discount rate has a considerable impact on results, as projects often have a very long time span (Pearce et al 2006; Koopmans and Rietveld 2013) Over a time-span

of 50 years, for instance, a rate of 4 per cent would reduce results in the final year by 86 per cent In developed countries discount rates on cost-benefit analysis usually range from 3 to 7 per cent (Zhuang et al 2007).Normative sustainability considerations come into play in arguments for downward-adjusted discount rates (Portney and Weyant 1999; Stern

et al 2007), but Nordhaus (2007) cautions that near-zero discount rates are inconsistent with market rates and opportunity costing Weitzman (2009) analyses the complexity of the issue by arguing for a discount rate which declines over time, in a model based on a combination of

a risk allowance for very large climate effects with moderate tions of technological progress and economic growth His approach is

expecta- The Political Economy of Sustainable Development

illuminating in that it brings the relevant independent variables together, but appears to beg the question in that we have no generally accepted way of specifying them And why should future generations have to put in the fruits of technological development and economic growth

to offset the way in which the present generation has squandered renewable resources? In short, there is no escape from the conclusion that establishing a discount rate in cost-benefit analysis implies a norma-tive judgement on fairness in distribution across generations

non-In spite of all these complications, cost-benefit analysis can serve a dual, and useful, heuristic function: (1) by combining ‘hard’ or refutable information with normative issues of valuation and distribution for which politicians have to seek legitimation, it completes the picture in policy design and (2) frames the way in which they can make themselves accountable in a democratic context

In terms of implementation, values of priced and non-priced benefits

and costs are expressed in terms of p × q, in which p is a price

gener-ated by demand and supply in market transactions or – where markets

fail – imputed or adjusted by political decision as a shadow price, and

q represents the envisaged impact or dosage-effect relationship in real terms Once complete sets of benefits pb × qb and costs pc × q c, are identi-fied to the best of our ability, and a discount rate for future costs and benefits is chosen, the feasibility F of a project under consideration can

be expressed as the relation between costs and benefits as shown below,

in which the p’s represent the market prices or shadow prices of inputs qc

required, and outputs or outcomes qb generated, showing how

interven-tions are feasible if F > 1, and not feasible if F < 1

on the supply side and guide individual preference on the demand side, so

that it looks, at least, as if actors in supply and demand know what specific item they are dealing with: one pound of prime quality beef q, for instance, has a price p, yielding an endogenous determination of its traded value

p × q In line with Gossen’s First and Second Law (as explained in Section 1.2), standard economics then assumes that people have enough informa-tion to equate the marginal costs of beef with its marginal benefits to reach

Introduction

their point of indifference between spending on beef and other purchases

Yet, in this example, ecological values are overlooked: cattle produceane (CH4), an unwanted externality that remains unaccounted for When market coverage is incomplete, sustainable development requires that policymakers assess and add-in non-priced impacts and introduce shadow prices to reveal environmental scarcities, or resort to regulation Valuations

meth-of such externalities should comprise direct as well as indirect effects, such

as the way in which infrastructural projects on subsurface water levels impact on flora and fauna in the surrounding area

In terms of social efficiency, a complete ordering of costs and benefits requires not just a credible discounting of future costs, benefits and risks or uncertainties, but also that (1) production functions describing

the technical relations between inputs and outputs of remedial actions

are known, that (2) markets throughout the economy are sufficiently competitive to yield factor prices indicating relative scarcities of inputs used in intervention (more on this in Section 1.5), and that (3) proxy valuations (shadow prices) for externalities are expressed in terms of money The monetizing condition is the most difficult one, but essential for making choices comparable when alternative solutions are available Section 2.4, however, will explore to what extent interactive governance and co-valuation by stakeholders may help to clarify valuations and to generate support for policy interventions Whether the welfare gains of a public policy or project are fairly distributed across individuals or groups

is then still another matter, discussed in Section 3.4 and Chapter 4

A realization-focused approach gets more complicated if an impact

q is not self-evident but needs further deliberation and specification Suppose a tract of land becomes available for development into a national park Then, the analysis proceeds in four subsequent steps:

what are the physical options for biodiversity in the design of



habitats and landscapes at this particular location?,

how could these options be measured in terms of

or ‘ecopoints’ q, as units of account for comparison?,

how do we price these ecopoints, and which set would add the

Step 3 acknowledges the empirical evidence that the marginal utility of

a particular (ecosystem) service tends to decline if more of it becomes

 The Political Economy of Sustainable Development

available, and in step 4, the assumption that people – and politicians – try to equalize the marginal utilities derived from the various items on which they want to see their resources spent; two basic planks of welfare economics known as Gossen’s First and Second Law and discussed in Section 1.2

Answers to these questions will have to be prepared by expert opinion,

in a preliminary ranking of all costs and benefits for ultimate political judgement. The exercise is complicated, but establishing consistently defined units of account on the basis of expert opinions and stakeholder representation that are open to continuous scrutiny is a major step forward in clarifying the ins and outs of ecological policies (Boyd and Banzhaft 2007; PBL 2009; Bateman et al 2011; Meinard and Grill 2011; Sagoff 2011)

Note, moreover, that defining p × q as separate dimensions recognizes that both may develop their own dynamics Large projects may affect markets and prices throughout the economy; moreover, non-market

prices p are derived from preferences and commitments of those willing

to pay (WTP) for environmental improvement, and from the willingness to accept (WTA) of those against Both WTP and WTA may shift over time,

however, highlighting again the sensitivity of the analysis Furthermore, quantities or impacts q may change as well, as a result of autonomous or

induced technological developments In the Netherlands, for instance,

public but individually billed facilities for purifying surface water proved over-expanded when polluting companies developed cheaper end-of-pipe solutions for themselves In short, expressing shadow prices p for the various impacts q in terms of money is a daunting task, riddled by risk and uncertainties The great challenge, therefore, ‘is to determine whether preferences are a stable construct’ (De Zeeuw et al 2008: 43)

In a seminal contribution, Coase (1960) argued that introducing markets for pricing hitherto non-priced environmental scarcities not

just increases social efficiency, but also highlights the reciprocal nature

of the problem He noted, for instance, that the aim should not be ‘to

eliminate smoke pollution but rather to secure the optimal amount

[ ], this being the amount that will maximize the value of production’ (p 42) However, the ‘Coase-solution’ and the ensuing practice of emis-sions trading are feasible only when unwanted items such as pollution and degradation are identifiable and excludable at manageable transaction costs When there is no excludability, or when facilities are intentionally provided in open access, a wide array of indirect valuation techniques is

Introduction

available As will be elaborated upon in Chapter 2, valuations range from gaming virtual markets in contingent valuation (Carson 2012) to staying close to revealed preference in reference groups (Rosen 1974), taking a cue from travel cost made to visit open access facilities, co-valuation by stakeholders (Van Schie 2010) and persuasion (management by speech)

or regulation In brief, reliance on consumer sovereignty and individual preference may have to make way for expert opinions and what Dasgupta and Pearce (1986: 66) call planner’s preferences

As noted before, cost- benefit analysis essentially is a comprehensive exercise in opportunity costing, a notion introduced in Section 1.2 It starts with exploring the status quo, analyses what is likely to happen – for instance, what species of wildlife will be lost if no action is undertaken – and then compares that prospect with (an) alternative solution(s), in a process that is further developed in Section 4.1 Obviously, predicting the future is riddled with uncertainties, which may call for the design

of scenarios capturing a range of sensitivities and likely variations in the net benefits of solutions considered Nevertheless, calculated risks and recognized uncertainties are important antidotes in controlling overam-bitious planners

1.4 Valuation, distribution and legitimacy

Traditional cost benefit-analysis concentrates on the net social value added by a policy or project for the relevant group of beneficiaries as a

whole Whether it should address concerns about the distribution of costs

and benefits across households, regions or countries within that group

as well remains a controversial issue among leaders in the economics profession, such as Pearce et al (2006: 61), in favour, or Mishan and Quah (2007), against The question is not trivial, and inspired by the dilemma whether economists should not confine themselves to matters of social efficiency and leave normative judgements on fairness to others Note, moreover, that spending for fairness may have its opportunity costs in terms of a loss of efficiency

From a policy point of view, however, this book considers tion on the distributional consequences of public interventions across (groups of) people a necessary condition to gain legitimacy, in the sense

informa-of an institutionalized and multi-dimensional acceptability informa-of trades

between rivalling criteria of ‘good’ governance, including the protection of

 The Political Economy of Sustainable Development

human dignity, freedom to choose, efficiency, effectiveness, fairness in distribution and sustainability As long as there is no comprehensive and commonly agreed body of good governance to deal with diversity, the primacy of politics will prevail and legitimacy is not trumped by legalism (Speekenbrink 2014: 180), but will have to be negotiated and customized under political guidance, in protocols of good practice that are further detailed down the line, as further explained in Sections 4.3 and 4.4 In today’s post-modern democracy, with a vocal polity, politicians have explaining to do if there is no equivalence of costs and benefits between

or within constituencies or across generations Hence, legitimacy has to

be sought for who gets – or pays for – what, why, where, when and how,

in which who denotes the interpersonal distribution of benefits or costs

on the same time line and what a desired outcome (p × q) in terms of trade-offs between criteria of governance just mentioned Why refers to

the normative underpinning of choices in terms of a theory of justice that gives guidance in dealing with fairness and with pleas for ‘not in my backyard’ or ‘grandfathering’ (honouring rights obtained in the past)

Where identifies the spatial and when the inter-temporal distribution and how, finally, whether costs, benefits and compensations are in money or

in kind We will discuss more about this in Chapter 3, Section 3.4

1.5 Short cuts: cost-effectiveness, standards,

multi-criteria and workable competition

Obviously, cost-benefit analysis often is a complicated and costly affair, not just in terms of money and time, but also in terms of the political effort required in gathering reliable information and in finding acceptable solu-tions when dealing with rivalling interests and criteria of good governance Hence, economists would not be economists if they were not trying to find short cuts to get ‘second-best’ results Specialized analysts may be able

to quantify the impacts or cost-effectiveness of defence spending or health

care, for instance, but have difficulty in monetizing results in a credible way Hence, political decisions may be made on the amount of defence spending as such, and perhaps on the distribution across army, navy and air force, but politicians should leave it to experts in the armed forces

to identify what, unceremoniously, is called ‘the biggest bang for a buck’, without putting a ‘price’ on the result (for more details, see Stiglitz 1986: 264–269) In health care, the sensitive issue of pricing the value of saving

Introduction

lives may be avoided by computing evidence-based quality-adjusted years saved as a benefit measure in real terms as well In a similar vein, environmental NGO’s may receive subsidies to support their mission as they see fit

life-Efficiency and cost-effectiveness may also be served by relying on

standard values Boardman et al (2006: 40) give the example of trees

planted along highways Trees may provide visual pleasure to motorists, reduce noise in adjoining neighbourhoods and filter pollutants from the air, but these benefits are hard to monetize Once the benefits of a repre-sentative project are estimated on the basis of techniques as referred to

in Chapter 2, this result may be used as a standardized indicator and netted with the actual cost estimate for projects in the near future

More generally, difficulties in valuation may be dealt in a multi-criteria analysis, in which different dimensions and scales, including outright

value judgements, are combined with financial indicators An important drawback of multi-criteria analysis, however, is that its value judgements are highly subjective and may even be manipulated to aim for a specific outcome The long and the short of it is that if we really cannot find a credible monetary valuation, we better put in a p.m for politicians to take a decision on

Summing up, cost-benefit analysis has its limitations, but its beauty remains that it tries to identify points of indifference in opportunity costing; here is Gossen’s Second Law again, as discussed in Section 1.2 The uncertainties and complexities listed above should not make us lose sight of the wood for the trees; that would be bad environmental economics What matters is that cost-benefit analysis provides a means

of gathering information on valuations in a systemic way, up to the point where we should leave well-enough alone

Ideal states of economic theory have their limitations as well As long

as entrepreneurs maximize profits to develop new products, there is room for a trade-off in policymaking between the stylized perfection of general equilibrium (Section 1.2) and prospects of innovation (Heertje 2006: 75–93), for instance in the transition from gas guzzlers to electric cars, or from carbon fuels (coal, oil and natural gas) to solar energy Sustainable development calls for a pragmatic and ‘imperfect’ trade-off between profit margins and risks in research and development that

has gained currency as workable competition In terms of fairness, more

alarming than profit taking is that governments in the rich part of the world disturb the international distribution of labour and discriminate

 The Political Economy of Sustainable Development

against developing countries by levying high import duties on tural produce in an aggregated amount that is estimated at two or three times total development aid

agricul-1.6 Global economic development and

ecological constraints

So far, we looked at individual projects at the local or national level This section goes deeper into the dynamics of global economic devel-opment, explores the limits of ecological sustainability and introduces the need for international cooperation The complications in policy design hitherto catalogued are dwarfed when compared to the impact of global economic development on the ‘carrying capacity’, ‘environmental

utilization space’, or ‘ecospace’ of the ecosystem as a whole This space

is defined by the balance of (1) resources harvested by society, (2) their

regeneration process (if any), (3) the emissions or pollutions they bring about and (4) the absorption processes in which the latter impacts are buffered, decomposed or otherwise neutralized (Opschoor 1995: 137) The greenhouse gases emitted by the use of fossil fuels, for example, are known to have a dramatic impact of global warming on water manage-ment, desertification and climate change, generally

In spite of the wealth of information generated by the Stern Review (2007) and the Fifth Assessment Report of the UN’s Intergovernmental Panel on Climate Change (IPCC 2014) – a major international research effort of top experts – there is still not enough awareness and political action regarding the challenges we are up to here Human well-being

crucially depends on the way we deal with stocks of natural resources and their capacity to generate flows of ‘ecosystem services’ enjoyed directly or

used in the production of other goods and services, in combination with human capital (know-how), social organization and man-made capital goods (Costanza et al 2014) Some of these inputs are renewable, but for the depletion of others we will have to find replacements, sooner, rather than later Sooner, in the case of the use of fossil fuels, because in addi-tion to the need for balance between depletion and regenerative capacity

or substitutes, there is the need to control emissions of greenhouse gases (CO2 and its equivalents, such as methane): the challenge of the dwindling ecospace for the use of carbons Opschoor (2010) and the IPCC (2014) conclude that temperatures may increase by some 4–5 degrees (Celsius)

Introduction

by 2100 (compared with a base period measured for 1860–1880) if no further action is taken, and compared to a limit of 1.5–2 degrees if we want to control dramatic and irreversible social and ecological impacts Since most of the observed warming is anthropogenic (caused by human action), Sections 4.4 and 4.5 will go into the governance of necessary actions and the dilemmas involved in sharing responsibilities for a sustainable future between rich and poor countries in what UN Secretary General Ban Ki Moon has called a ‘defining issue of our era’ Transition management towards a more sustainable development requires efforts

in both mitigation of adverse effects and adaptation to its consequences,

a useful distinction made in the Stern Review (2007) Adaptation to heat waves or rising sea-levels in Venice or Bangladesh might reduce the disruption caused by climate change, but cannot deliver full compen-sation Actually, costs of adaptation will rise exponentially if efforts to mitigate emissions are not successful Dealing with climate change will

be a never ending story of aligning international support for ideas with a longtime horizon and uncertainty about future developments (Loorbach 2007) Aiming for sustainability is not a one-shot affair, but an endless array of challenges and interlocking decisions that all have their own costs, benefits and path-dependencies Notions of path-dependency and

‘lock-in’ have become common currency after David (1985) published his

‘economics of qwerty’, showing how the top-line of the first typewriter set the standard that we are still working with Hence the need to develop alternative scenarios of future developments and to plan for flexibility and adaptability if things don’t work out as anticipated Yet, there is good news as well The hole in the ozone layer, as a source of global warming, has meanwhile started to shrink, after successful international regula-tion prohibiting the use of chlorofluorocarbons (CFS’s), and emissions

of acid rain have been substantially reduced as well

Valuation

Abstract: This chapter focuses on whose values count (and

on how well-informed judgements are or can be) In that perspective, the chapter shows in nine steps how reliance

on consumer sovereignty and revealed preference gradually makes way for stated preferences, where individuals or their representatives answer hypothetical and, possibly, leading questions in surveys and statements made by experts

and, subsequently, for preference imposition in ‘planners preferences’.

Wolfson, Dirk Jacob The Political Economy of

Sustainable Development: Valuation, Distribution,

Governance Basingstoke: Palgrave Macmillan, 2015

doi: 10.1057/9781137552754.0006

Valuation

A major difficulty in valuing environmental goods and services is that they are often non-excludable public goods, such as wildlife, the ozone layer or attractive panoramas (Perman et al 2011: 411) Hence, environ-mental policy is, essentially, about the distribution of sovereignty between individual citizens and public authorities in valuating scarce resources and controlling their use in an effort to stay within the environmental utiliza-tion space introduced in Section 1.6 Against this background, the focus in

the following presentation is on whose values count (or how well-informed judgements are or can be) In that perspective, it will be shown

how, in Sections 2.1 and 2.2, reliance on consumer sovereignty and



revealed preference gradually makes way for

‘stated preferences’,

answer hypothetical and, possibly, leading questions in surveys and statements made by experts in co-valuation (Sections 2.3 and 2.4) and, subsequently, for

expert opinions

and Pearce (1986: 66) call ‘planner’s preferences’ (Sections 2.5–2.7),

a development that will be further explored in a reconsideration

of economic theory and the theory of democracy in Sections 3.1–3.3 and Chapter 4, where ways are developed to reduce the gap between public supply and consumer sovereignty in interactive governance and a deliberative style of democracy

Furthermore, a distinction is made between the process of valuation – either by individuals, their representatives or public authorities – and

instruments or mechanism designs to influence values and behaviour, as well

as between use values, option values and non-use values Use values refer

to productive inputs or hazards to be averted: forest provide timber, clean rivers and oceans fish and emissions from fossil fuels are bad for your

health Option values refer to ‘existence values’ that are appreciated for their

own sake, for example endeavours to safe endangered species of those who

might sever see them in the wild; and non-use values are revealed in caring

about what future generations will inherit (Smith 2011: 77)

2.1 The ‘Coase solution’ and emissions trading

Section 1.3 already introduced the ‘Coase solution’, a mechanism in which the polluter pays an appropriate compensation to legitimate claimants in

 The Political Economy of Sustainable Development

private transactions governed by contract law Suppose strawberry ers claim damages because their crop is wasted by soot from a steel-mill nearby Then, compensation for spoiling the use value of strawberries equal to the difference in net income from a next-best washable crop – say, cucumbers – might be appropriate, and enforceable in court if needed The trade-off recognizes the reciprocal nature of the problem; over time, it may reduce but not entirely eliminate smoke pollution, with

farm-a solution thfarm-at mfarm-aximizes the socifarm-al vfarm-alues involved Public officifarm-als mfarm-ay

be involved in an advisory capacity or in mediation, but the essence of the solution is that private partners agree on reciprocal obligations in solving an environmental problem

With this mechanism design, Coase laid the groundwork for the expanding practice of emissions trading, a technique whereby sustain-ability demands that initial allotments of emissions are established on the basis of an estimate of the regenerative capacity of an ecosystem, and somehow distributed among polluters The parties concerned will,

in principle, decide for themselves whether to sell their allotments or buy additional emission rights if needed, and settle their own terms of trade, although some mediation or even subsidization may be in order

to stimulate adjustment and innovation, or to generate acceptable results

in the realm of distribution Private transactions are attractive in that they respect individual sovereignty in promoting an optimal allocation Emissions, in this case, are traded on the basis of voluntary exchange, and trading is feasible when unwanted items (pollution) are identifiable and excludable at manageable transaction costs Long-term confidence

in the continuity of the scheme, a deep and liquid market and robust administrative systems are necessary conditions for success

2.2 Hedonic pricing, travel cost method and

averting behaviour

Indirect ways of determining use values may be available when sion is impossible, too expensive or not wanted Prominent examples are

exclu-hedonic shadow pricing and the travel cost method The exclu-hedonic mode

values policy impacts on the basis of market transactions in a reference group (Rosen 1974) Applications refer, for instance, to the observable fact that structurally identical houses are priced higher in a quiet or otherwise desirable environment than close to an airport, which yields an indication

Valuation

of the value of noise abatement Or else, benefits of maintaining the safety and quality of drinking water may be measured in terms of the neces-sary private or public investment required for a satisfactory result, or compared with the alternative of using bottled water (Just et al 2004: 563)

The travel cost method is an example of a whole family of approaches that

derive valuations from the complementary cost made on a market good, such as transportation to visit recreational facilities (Hotelling 1947) Another way of revealing individual preference indirectly is by reference

to experience goods (Boardman et al 2006: 84): new projects that resemble

environmental facilities with which people or their representatives have previous experience from which a valuation may be derived

In averting behaviour, hedonic pricing and revealed preference valuate

damage reduction by looking at what people are actually willing to pay to isolate themselves from environmental ‘bads’, for instance by spending on double-glazing to abate aircraft noise In that case, there may be a private

as well as an ecological ‘excess benefit’ of joint production here, as glazing also reduces the energy bill Noise abatement, incidentally, is a good example of how a cost-benefit analysis should consider all available solutions Private isolation is one option, public intervention to reduce the number of flights another, banning the noisiest airplane models a third and tearing down residential housing in the worst noise contour a final one There is a nasty complication in targeting individual compensation, however Most of the burden may have been born by previous owners, who have sold their house at a considerable discount, which makes attribution

double-of damages complicated, if not politically uncomfortable

More generally, we also have to watch for unintended joint productions

on the downside When highway capacity is overloaded, for instance, not just travel time is wasted, but traffic jams will increase emissions from fossil fuels as well However, once congestion is reduced, for instance by road expansion, additional traffic may be induced, and emissions may increase again

2.3 Stated preferences: contingent valuation and

 The Political Economy of Sustainable Development

to reduce travel time and resulting emissions substantially and/or to provide open access to a nature reservation on the other side Bridges have a given and rather substantial indivisible capacity, particularly if

we want dual lanes for safety reasons Exclusion, by way of a toll, may

be socially inefficient, however, as long as that capacity is underutilized

In a multi-goal analysis, rationing something that is not scarce would nullify the intended open access of the reservation In such a situation, there appear to be two evaluative options available: contingent valuation

or choice experiments

Contingent valuation, as an alternative to identify valuations when

exclusion is impossible or socially inefficient, rests on random sampling

of people that are interviewed to state their preferences about ness to pay for a project as if there were a market for it The presumption

willing-of such a ‘bidding game’ (Just et al 2004: 564) is that a project is feasible

as long as aggregate net benefits stated by those in favour, corrected for

the additional burden of taxes diverted from private use to pay for it by those against and outvoted, exceed its costs Without exclusion, however, there is no real ‘bidding’ involved here Since questions and answers are hypothetical, people might overstate their preferences in a ‘hypothetical bias’ when they expect to share the taxpayers’ costs with large numbers

of non-users anyway, unless there are ways of convincing respondents that they would indeed pay their share (Carson 2012: 31) Nussbaum (2000: 1029), moreover, cautions they might state preferences deformed

by malice, envy, resentment or fear, or aim to please by giving politically correct answers

Clearly, going beyond observed behaviour in markets and relying

on stated preference in interviews is quite an act to follow, particularly when the people interviewed have no previous experience with similar policies or projects envisaged Analytically, moreover, contingent valua-

tion is sometimes explained as a way of going for the consumer surplus:

the ‘bonus’ resulting from the difference between what people, in case of

excludability, would be prepared to pay and the price they actually pay for

market goods Even when people are unbiased, truthful and cooperative, however, asking for their entire consumer’s surplus would overstate the value of non-excludable goods in relation to excludable market goods that general equilibrium theory assumes to be valued at marginal costs, without ‘confiscating’ their ‘bonus’ or surplus benefit This hitch in the notion of optimal allocation seems to be treated with benign neglect in received doctrine (benign, insofar as it keeps things simple)

Valuation

In short, when there is no preference revealed by excludability and no guidance from previous experience, the alternative of contingent valua-tion in stated preferences is a questionable, complicated and often rather expensive alternative While improvements in surveying have made contingent valuation an acceptable second-best to many researchers (Arrow et al 1993; Bateman et al 2002; Just et al 2004: 564–566; Perman

et al., 2011: 415–429), consensus on reliability is still far away, as

drama-tized in a debate in the Journal of Economic Perspectives (2012) between

Carson – very much in favour – and more critical opinions from Kling

et al and, particularly, Hausman, who prefers expert judgements on the supply side The crux of the disagreement is whether there is a credible alternative on the demand side, when appraising non-excludable use-,

option-, and existence- or non-use values of preservation or bequest for

future generations (Stevens 2005; Boardman et al 2006; McVittie and Moran 2010; Smith 2011: 78)

Gaps in the perception of the people interviewed may be dated by presenting a limited number of alternative projects with care-fully specified bundles of attributes in a choice-experiment (Perman et al 2011: 429–433; Kling et al 2012: 8), with the risk that the winning project reflects the ‘prefabricated’ preference of experts on the supply side, rather than concerns of lay citizens in the relevant area If, on balance, surveys

accommo-of willingness to pay or to accept remain controversial, the process may indeed be reversed, shifting responsibility primarily to the policymaker

on the supply side The issue then becomes to indicate what the minimal

social benefit of a project under consideration would have to be in order

to seek democratic approval for its allocative and distributional tunity costs What is often overlooked, however, is that policymakers may derive indications of willingness to pay for option values, existence values or passive use from donations paid to the World Wildlife Fund and other environmental NGO’s, the fruits of which contributors may never see for themselves

oppor-2.4 Co-valuation and externalities in production functions

As another extension of surveying techniques in contingent valuation, co-valuation introduces stakeholder participation in the design phase of

a project Participatory strategies bring expert opinions on the supply

 The Political Economy of Sustainable Development

side and preferences of groups of citizens and/or their representatives on the demand side together in an effort to find an acceptable monetized valuation The issue at stake here is whether decisions should focus primarily on monetized information provided as choice options by independent experts in the field or should take into account the possi-bly more emotionally charged values held among stakeholders or their representatives as well Van Schie (2010: 16), who researched processes

of interactive governance in spatial water management, claims that co-valuation between experts and stakeholders or stakeholder repre-sentatives may further legitimacy in the sense or public acceptance of public interventions Apart from furthering trust, consultation of the

‘wisdom of the crowds’ may also come up with alternative and more acceptable configurations of policy measures Involving stakeholders in the process of valuation and decision making raises the issue whether different parties can be united on a common purpose In his Nobel Lecture, Herbert Simon (1978: 352) recalls a field study of an envisaged public recreational facility in Milwaukee which was to be managed jointly by the school board and the city public works department Both were arguing their case in good faith, the school board wanted a budget for play supervision, and the public works department sufficient funds for maintenance To the school board, the playground was a social facility, where children could play under adult guidance; to the public works administrator, it was a physical facility, a green oasis in a grey city Sometimes, different perspectives are emotionally grounded, as in the ongoing debate whether game in game parks should be given additional feeds in hard winters, versus the purists who want to let nature keep its course Here again, as in the previous case of dubious compensation in noise abatement (Section 2.3), there is no escape from the conclusion that policy analysis might bring to light uncomfortable issues

Summing up, co-valuation brings different perspectives and tives out in the open, calling for checks and balances in the architecture

objec-of decision making To that effect, for instance, the cost-benefit analysis

of an expansion of Schiphol, the airport of Amsterdam, was supervised

by an independent and partly international steering committee (as an antidote to the ‘warm glow’ of feelings for the national carrier KLM) At its first committee meeting with the industry, the airline and the airport management gave a glowing account of the importance of the European hub function of Schiphol in keeping the Dutch economy well-connected, upon which the committee’s Canadian expert on landing rights suggested