Economics of Rangeland Improvement Practice

October 05, 2012 Print Friendly and PDF

Written by John Tanaka, University of Wyoming

Economic Feasibility

Economic feasibility is defined as the condition where discounted returns exceed discounted costs. In other words, will the project pay for itself? Discounting is the process where future values are reduced to current values through a discount rate and time. An economically feasible project has a present net worth (PNW) greater than or equal to zero, a benefit/cost ratio (B/C) greater than or equal to 1, and an internal rate of return (IRR) greater than or equal to the appropriate discount rate.
Economic feasibility is determined through the use of three different tools using the same basic information. How the tools are developed depends on the assumptions that need to be made and what the purpose of the analysis is.
The three tools are Present Net Worth (PNW), Benefit-Cost Ratio (B/C), and the Internal Rate of Return (IRR). All three methods require that the physical, biological, and ecological relationships are estimated. That is, we need to know how a rangeland ecosystem will respond to a change caused by the practice. Each of these tools is described as well as its use in economic decision-making on rangelands.
See: Workman, John P. and John A. Tanaka. 1991. Economic feasibility and management considerations in range revegetation. Journal of Range Management 44(6):566-573.

Economic Efficiency

Economic efficiency is the term used to identify the most economically efficient set of projects or enterprises for which a decision-maker may expend time, capital, and land. It is the combination of things you can undertake that will lead to the most productive use of capital and other inputs. The economically efficient project will yield a higher net return than any other potential use of capital. It is often used synonymously with the term "economic optimization."
Economic feasibility may be considered a necessary condition for maximum net returns. Economic efficiency is considered the sufficient condition. Economic efficiency promises the "biggest bang for the buck" (Workman 1984).
For more information, see:
  • Workman, John P. 1984. Criteria for investment feasibility and selection. p. 1475-1507. In: Developing Strategies for Rangeland Management. National Research Council/National Academy of Science. Westview Press, Boulder, Colo.
  • Workman, John P. and John A. Tanaka. 1991. Economic feasibility and management considerations in range revegetation. Journal of Range Management 44(6):566-573.

Cost Effectiveness

While economic feasibility and economic optimization provide information on whether a project will pay for itself or whether it returns the most possible, it is often the case that the decision-maker will have to choose among a variety of possible projects in the face of limited budgets or time. In other cases, a manager may have to implement a project that is not economically feasible but rather addresses a critical need.
In these cases, a manager should seek the least costly way to accomplish the specified goal. There may be several alternative ways to achieve the goal, and economic analysis can help in deciding how the goal is achieved. As Workman (1984) put it, this is seeking to produce a "specified bang for the buck."

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This work is supported by the USDA National Institute of Food and Agriculture, New Technologies for Ag Extension project.