ORESTALLING OR REDUCING THE CONSEQUENCES of pollution is not a costfree exercise, and, as a result, any proposed policy or regulation should assess
the relative beneﬁ ts as well as costs. Commonly used by governments to choose between competing public projects, cost-beneﬁ t analysis (CBA) has been adopted as a useful conceptual framework for assessing policies and projects that have an environmental impact. The mathematical formulation of CBA is straightforward and is represented in equation #1 for any given project:
Where: NPV = net present value B i = beneﬁ ts of that project in period i C i = costs of that project in period i r = discount rate per period n = relevant time horizon
One of the common decision rules of CBA is to choose the project (or projects) with the highest NPV. The central principles of CBA analysis are that (1) all relevant costs and beneﬁ ts of alternatives must be included and monetized, and (2) all future costs and beneﬁ ts must be discounted using an appropriate discount rate. There are conceptual challenges to CBA over issues related to intergenerational equity and the choice of an appropriate discount rate. Both of these concerns are addressed later in this chapter.