Counting the social costs and benefits

Press, 4 December 1978, Page 16

Counting the social costs and benefits

By-

ERIK ECKHOLM

I for the Worldwatch Institute, Washington, D.C.

Economists,’ for all their recent failings,. have developed some useful analytical tools. One that could improve the effectiveness of government policies in several areas is social accounting.

Social accounting, or social cost-benefit analysis, is for public decision makers what financial analysis is for corporations or individuals: a means of weighing the desirability of potential investments or policies. It is probably most widely used by foreign aid agencies, such as the World Bank, which must choose how to spend scarce aid funds.

The basic idea is simple. Instead of merely considering the direct expenditures and subsequent financial returns a project entails for the implementing company or agency, the analyst tries to add up the investment’s costs and benefits for society as a whole. Planting trees on a stretch of denuded hillsides, for

example, might be a losing financial proposition for landowners. But a social accounting would examine the potential economic gains of reforestation for downstream residents in terms of reduced sedimentation and flooding, and would ascribe value to recreational uses of a new forest. Should the cost-benefit calculus tilt in favour of. reforestation, a case may exist for plantings by a public agency or with a public subsidy. Social accounting can also help to show the consequences of much broader social policy decisions. But, while this approach is wellknown among technocrats, its usefulness often seems beyond the vision of politicians and the public. The result can be shortsighted policies that squander society’s resources.

Examination of three United States issues reveals the sometimes surprising insights that can be gleaned from social accounting:

1. Anti-smoking policies: American cigarette companies claim that cigarette sales generate $6OOO million a year in taxes, providing a key revenue source to state and local governments. The implication, apparently accepted by many politicians, is that society cannot afford to jeopardise these revenues with aggressive anti-smoking policies. The hidden costs of smoking, however, include extra medical expenses, worker productivity lost through excess illness and premature death, and fires caused by smoking materials. These total well over $20,000 million a year nationwide, more than three times the taxes extracted from the tobacco trade. An in contrast with taxes, which merely involve a transfer of resources from one group to another, many of smoking’s costs entail actual reductions in the real resources available to society.

Clearly, a successful pro-

gramme to reduce smoking would leave society wealthier as well as healthier. Whether particular antismoking initiatives would also be wiser remains, of course, open to political debate: social accounting can clarify the economic, but not the ethical, dimensions of an issue.

2. Air pollution control: Industry representatives and even many economists bemoan the “unproductive” corporate investments needed to meet legislated cleanair goals. However, in a recent study, “Air Pollution and Human Health,” Lester B. Lave and Eugene P. Seskin conclude that the annual expenditure of $9500 million needed to meet the stationa-ry-source pollution standards set for 1979 will result in $16,100 million saved each year in health-related benefits alone, not to mention the reduced damages to property, crops, and wildlife and the esthetic gains that will be involved.

The problem is that the costs of reducing factory air pollution must be borne by

particular companies, while the benefits of clean air are diffused throughout society. But protecting the public interest in such cases is surely a prime reason for having a government 3. Solar energy subsidies: Solar devices such as hot water heaters may seem a bad investment to individual consumers, who compare the costs of buying and maintaining solar equipment with those of conventional electric or gas-powered alternatives. However, producing increased supplies of electricity or natural gas can involve huge costs that are not adequately reflected in the bills of new consumers. To meet rising electricty demand, for example, companies are building new nuclear or other power plants whose per-unit cost of production is, in some areas, more than 10 times the rate

paid by consumers. The consumer rate represents not the true cost of additional production, but

rather the average cost of electricity generated by older, cheaper plants together with that by newer, more expensive plants. In this case, a government subsidy for solar devices may well make sense on narrow economic grounds, let alone because of concern about nuclear power or the future availability of fossil fuels. Far from being a public giveaway, such a subsidy can encourage individual actions that ultimately save society money.

Social accounting is not a means of avoiding politics. Ascribing dollar values to hidden costs and benefits is a value-laden act, and the ways in which the ultimate consequences of policies are distributed among individuals is perhaps the essence of politics.

But, properly used, social accounting can help give us a clearer idea of the nature and implications of our political choices. It can help us catch a glimpse of the public interest through the myopia and special-interest claims that befog nearly every policy debate.