Chapter 7 trade offs

Why do trade-offs exist?

Resources are scarce, while human wants are unlimited.

What is a trade-off?

Choosing one use of scarce resources means giving up another possible use.

What is opportunity cost?

The value of the next-best use of resources that is given up.

What does a PPF show?

Efficient combinations of two goods that can be produced with limited resources.

What does the slope of a PPF represent?

The rate at which one good must be traded for another.

What does a concave PPF represent?

Increasing amounts of one good must be given up to gain more of the other.

What is an efficient use of resources?

You cannot increase one output without decreasing another.

When is CEA useful?

When there is one specific goal and options can be compared by their costs.

What is the main idea of CBA?

Convert costs and benefits to money and compare their net benefits.

What is extended CBA used for?

Evaluating projects from society’s perspective and their effect on social welfare.

When is MCA useful?

When decisions involve multiple criteria that cannot all be expressed in money.

What is the key difference between CBA and MCA?

CBA monetises impacts; MCA can use monetary, physical, and qualitative criteria.

What is the first step of CBA?

Define the alternative options or scenarios being compared.

What is the business-as-usual option?

The baseline of continuing existing policies or making no new investment.

Why compare “with” and “without” a project?

To identify changes caused by the project rather than changes that would happen anyway.

What should good scenarios be?

Understandable, distinct, realistic, possible, and supported by existing information.

What are three types of scenarios?

Backcasting, explorative, and predictive scenarios.

What happens during CBA impact assessment?

Identify, distribute, and quantify all relevant costs and benefits.

Why consider who receives costs and benefits?

Different groups may gain or lose, affecting fairness and political acceptability.

Why are ecosystem-service impacts difficult to quantify?

They often require knowledge of ecological, hydrological, and climatic processes.

Why are ecosystem services difficult to value in CBA?

Many are not directly traded in markets, so their monetary value must be estimated.

What is NPV?

Present value of benefits minus present value of costs.

What does a positive NPV indicate?

The project improves social welfare according to the CBA.

What is the benefit-cost ratio (BCR)?

Discounted total benefits divided by discounted total costs.

What does a BCR greater than 1 mean?

he project’s benefits exceed its costs.

What is the internal rate of return (IRR)?

The discount rate at which a project’s NPV equals zero.

What is a major limitation of CBA?

All relevant costs and benefits need to be expressed in monetary terms.

What is an effects table in MCA?

A table showing alternatives against the criteria used to evaluate them.

Why are MCA scores standardised?

To put different criteria onto a common scale for comparison.

PPF Graph

It shows the different combinations of two things that can be produced using limited resources.

Think: More recreation ↔ less biodiversity protection

The important things to understand:

• On the curve = resources are being used efficiently.

• Inside the curve = resources are not being used efficiently.

• Outside the curve = currently impossible with the available resources.

• Moving along the curve = trade-off.

• The amount of one thing you give up to get more of another = opportunity cost.

The chapter also shows different shapes of PPFs:

• diminishing transformation

  • Shape: Curves outward.

    Meaning: The opportunity cost increases as you produce more of X.

    So, every additional unit of X requires giving up more and more Y.

    👉 Remember:
    Curved = increasing trade-off

• no trade-off

  • Shape: An L shape.

    Meaning: You can increase one good without having to give up the other (within the relevant range).

    👉 Remember:
    No trade-off = you don't have to sacrifice one for the other.

• constant rate of transformation

  • Shape: Straight line.

    Meaning: The opportunity cost stays constant.

    Every additional unit of X requires giving up the same amount of Y.

    👉 Remember:
    Straight line = constant trade-off

• limits on transformation

  • There is a point where you cannot keep increasing one good indefinitely because of a physical/resource constraint.

    👉 Remember:
    Limit = eventually you hit a constraint.

CBA: Costs and Benefits over Time

The important concept is discounting.

A benefit of €1,000 received today is considered more valuable than €1,000 received many years from now.

So:

Future value → discounted → Present Value (PV)

And remember:

NPV = PV of benefits − PV of costs