On non-marginal cost-benefit analysis

Simon Dietz and Cameron Hepburn ()

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

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.

Keywords: Cost-benefit analysis; non-marginal; project appraisal; discount rate; infrastructure investment; climate change; hydropower dam (search for similar items in EconPapers)
JEL-codes: D61 H43 Q54 (search for similar items in EconPapers)
Pages: 26 pages
Date: 2010-03
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Citations: View citations in EconPapers (5)

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Related works:
Working Paper: On non-marginal cost-benefit analysis (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:37591

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