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A benefit-cost analysis of the coal development of Kaiser Resources Ltd. Mohr, Patricia M.

Abstract

This paper is a benefit-cost analysis of the coal development undertaken by Kaiser Resources Ltd. in the Crowsnest area of British Columbia. The benefit-cost analysis is undertaken from the "point of view" of residents living in the East Kootenay prior to the development. The analysis seeks to examine the production efficiency of the allocation of resources resulting from the project from the point of view of East Kootenay residents. The project will provide primary gross benefits in the form of payroll income to local labour. The social opportunity cost of the use of this local labour must be subtracted from payroll income to obtain the net primary benefit. The social opportunity cost of labour is the value of the marginal product of the labour in alternative employment. A secondary benefit will accrue to local factors in the form of an increase in local income through an expansion of service and retail industries. The expansion will result from the regional multiplier effect of the increase in payroll income in the East Kootenay. The general level of unemployment was high in the East Kootenay prior to the development, and I assume that sufficient local labour and facilities exist to supply the increase in demand for services without requiring importation of labour or capital. Income generated by the regional multiplier will therefore accrue to local factors, located in the East Kootenay prior to the development. Intangible benefits in the form of training in coal mining and an increase in the cultural activities of the community will also occur. The costs attributable to the project include the negative externality effect on wildlife and the deterioration of the quality of the environment in the East Kootenay. A decline of wildlife will decrease the value added by local labour in supplying services to non-resident and residents hunters. The consumers’ surplus obtained by residents from hunting will decline, since greater expenditures will be incurred elsewhere for the same or a lower quality of hunting. The tourist industry will also decline in the East Kootenay. The decrease in local value added due to a decline in the quality of hunting and tourism can be estimated. However, the cost to residents of the East Kootenay from deterioration of the quality of the environment cannot be estimated and the effect is denoted as an unmeasurable intangible cost. The cumulative present value of net measurable benefits at 9% is $l4,717.983. A decision concerning the desirability of the project cannot be made on the basis of this calculation alone. The unmeasurable intangible costs and benefits must also be taken into account. The community, using the relative valuations placed on increased regional income versus the quality of the environment as expressed in a political consensus, must decide how large the unmeasurable intangible costs and benefits are. The project is desirable when only measurable benefits and costs are considered. However, if the cumulative present value of net unmeasurable intangibles is negative and exceeds in magnitude the cumulative present value of net measurable benefits, the Kaiser project should be terminated.

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