ECO 370 Week 3 Cost-Benefit Analysis Example

Is Paying Farmers to Cut Runoff Worth It? A Twenty-Year Cost-Benefit Analysis of a Maumee Basin Nutrient Program, With Discounting, Sensitivity and Who Gains

[Student Name]

University of Phoenix

ECO/370: Environmental Economics

Week 3 Assignment

[Instructor Name]

[Date]

The program and all figures are composites written for a model paper, loosely patterned on state nutrient initiatives; methods and research findings come from the sources listed.

Weeks 1 and 2 established that phosphorus runoff from the Maumee basin imposes costs on western Lake Erie's users and estimated those costs in dollars. A composite state program now proposes to pay farmers in the basin to adopt practices that reduce runoff. The legislature asked whether the program is worth its cost. Cost-benefit analysis cannot capture everything a lake means to people, but it can show whether the measurable gains justify the measurable costs and which assumptions decide the answer. This paper conducts the analysis.

Scope and Baseline

The program would enroll about 1.5 million acres over five years, about half the basin's cropland, paying for soil testing and nutrient management plans, cover crops, edge-of-field buffer strips and about 6,000 acres of restored wetlands. Without the program, the baseline assumes current practices continue, with slow voluntary adoption and phosphorus loads roughly unchanged. Scientific targets call for reducing spring phosphorus loads by about 40 percent to keep blooms mild in most years; the program aims for a 25 percent reduction from its practices alone.

Costs

The state's payments average about $18 per enrolled acre a year for management plans and cover crops, about $27 million a year at full enrollment, plus about $150 million over five years for wetland restoration and $4 million a year in administration. Farmers bear additional costs beyond payments for some practices, estimated at about $5 an acre a year. Payments themselves are transfers from taxpayers to farmers; the social cost is the resources used, such as seed, labor, land taken out of production and administration. For simplicity, the analysis treats state outlays plus farmers' net costs as the resource cost, a conservative choice since some payments exceed farmers' actual costs.

Benefits

Benefits draw on Week 2's values, scaled to a 25 percent load reduction: avoided treatment costs, smaller property value losses, recovered fishing value and the non-use value residents place on fewer blooms. The analysis assumes that a 25 percent load reduction cuts bloom-related damages by about 30 percent once practices are established, since blooms respond strongly to spring loads. Annual benefits rise as acres enroll and wetlands mature, reaching about $55 million a year by year five.

Discounting

Costs come early, especially wetland construction, while benefits build over time, so discounting matters. The analysis uses 3 percent, a rate federal guidance has long used for policies affecting consumption, and tests 7 percent, which reflects the return on private capital. Boardman et al. (2018) discuss the case for lower rates for environmental benefits spread over long periods. Weitzman (1998) argued that uncertainty about future rates justifies declining rates for distant benefits.

Results

Over twenty years at 3 percent, the present value of costs is about $645 million and of benefits about $715 million. Net present value is about $70 million, and the benefit-cost ratio is about 1.11. At 7 percent, early costs weigh more heavily relative to later benefits: costs fall to about $470 million in present value and benefits to about $486 million, leaving a net present value of only about $16 million and a ratio near 1.03. The program passes comfortably at the lower rate and barely at the higher one.

Sensitivity to Effectiveness

The largest uncertainty is how much runoff falls. If practices cut loads by only 15 percent, benefits fall by about 40 percent and the program fails at either rate, with a net present value near negative $200 million. If they achieve 30 percent, benefits rise by about a fifth and net present value rises to roughly $110 million to $210 million depending on the rate. Effectiveness depends on targeting: enrolling fields with the highest phosphorus losses delivers far more reduction per dollar than enrolling acres at random.

Targeting as the Hidden Variable

Research on agricultural runoff consistently finds that a small share of fields produces a large share of phosphorus losses, because of slope, soil type, drainage and fertilizer history. A program that enrolls whoever volunteers first may pay for practices on low-risk fields, while one that ranks fields by risk and pays more for high-risk acres can achieve the same load reduction for much less. In this analysis, moving from random to risk-ranked enrollment raises the expected reduction from about 20 to about 30 percent for the same budget, which is the difference between failing and passing the test at a 7 percent rate.

Distribution

State taxpayers across Ohio pay for the program, while benefits concentrate in the Toledo area, along the lakeshore and among anglers. Farmers in the basin receive payments that cover most of their costs and, for some, more. Lower-income households in Toledo, who spend a larger share of income on water bills and bottled water during emergencies, gain proportionally more from cleaner water. A program that is efficient overall still shifts resources from taxpayers statewide to a region.

What the Analysis Leaves Out

Some benefits are hard to value: reduced health risks from toxin exposure beyond emergencies, improvements in other water bodies along the river and benefits to wildlife. Some costs are uncertain too, including how long farmers keep practices after payments end. Arrow et al. (1996) argued that cost-benefit analysis should inform, not dictate, decisions, precisely because of such gaps.

Recommendation

The program is worth funding if it targets the fields with the highest phosphorus losses and monitors results. Under that condition, its expected net benefits are positive at a 3 percent rate and just positive at 7 percent, with unmeasured benefits likely tipping the balance further in its favor. The legislature should require edge-of-field monitoring on sample farms and review enrollment priorities every two years.

Conclusion

A twenty-year analysis finds that paying farmers to cut runoff produces benefits exceeding costs by about 11 percent at a 3 percent discount rate and by only about 3 percent at 7 percent. The result depends most on how effectively the program reduces phosphorus, which depends on targeting. With good targeting and monitoring, the program is a reasonable investment, and its benefits fall disproportionately to the households most exposed to bloom emergencies.

References

Arrow, K. J., Cropper, M. L., Eads, G. C., Hahn, R. W., Lave, L. B., Noll, R. G., Portney, P. R., Russell, M., Schmalensee, R., Smith, V. K., & Stavins, R. N. (1996). Is there a role for benefit-cost analysis in environmental, health, and safety regulation? Science, 272(5259), 221-222. https://doi.org/10.1126/science.272.5259.221

Boardman, A. E., Greenberg, D. H., Vining, A. R., & Weimer, D. L. (2018). Cost-benefit analysis: Concepts and practice (5th ed.). Cambridge University Press.

Weitzman, M. L. (1998). Why the far-distant future should be discounted at its lowest possible rate. Journal of Environmental Economics and Management, 36(3), 201-208. https://doi.org/10.1006/jeem.1998.1052