Solving the multi-benefit problem
Part of What Would Make Life Better?
Why don’t we plant more trees in our cities and countryside? Why don’t we insulate our homes more? Why don’t we have more green infrastructure to absorb excess water in the streets and the hills — and why do we instead build sewers and flood walls downstream to divert that water? Why do we often struggle to invest in preventing people getting sick, and end up spending more treating them? This list of questions could go on.
Your instinctive answer to these questions might be: planning regulations. Or lack of political foresight. Or devotion to cars. Or a combination of these and other things.
But there is one thing these issues, and many others, have in common: they are what I’m calling “multi-benefit problems”.
What is a multi-benefit problem? It occurs when something — an intervention or an investment — has many different benefits, but none of those benefits is enough on their own to justify the cost. The result is usually that these things do not happen, despite their many benefits. I think this is a surprisingly common problem which stops us doing lots of obvious things that would make our lives better, from greening our cities to improving our health.
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Let’s consider a couple of multi-benefit problems. First: planting trees. Trees have many, many benefits. They reduce flood risk and clean water. They absorb carbon. They host nature. They cool our towns and cities down (seriously, try standing near a tree in a heat wave). They can provide timber, if managed effectively. They’re great for recreation. And yet we don’t have nearly as many trees as we should — even in the UK we often chop them down. The reason: it is rare that any one of the benefits exceeds the cost of buying the land and planting the tree.
Another example: insulating our homes. Again, it has many benefits. It reduces your energy bills. It makes your home more comfortable. It’s good for your health. It eases pressure on the electricity grid. It reduces carbon emissions. Many of those things are private benefits — they accrue to the person paying for it. And yet, many home owners seem reluctant to do the more expensive forms of insulation, such as wall and window insulation. Why? Because the energy saving often doesn’t justify the expense on its own, and nor do the other benefits.
But why, you might be thinking, if these things have so many benefits do they not get funded?
Where benefits are privately owned — such as energy bill savings or the revenue from selling timber –it doesn’t make sense for that individual to pay, if the private benefit doesn’t outweigh the cost. This looks like a classic problem of positive externalities: the benefit is spread across many people, so you need some kind of collective mechanism (like taxation) to help fund it. But even if there are no externalities, and all the benefits are private, it can still be hard to work out who pays for the benefit.
Surely the state should be able to fund these multi-benefit things, though? Sadly, it is often not very good at this. Funding streams in governments — particularly central governments — tend to be allocated for specific objectives. Flood budgets are spent on reducing flood risk. Water quality budgets are spent on cleaning water. Multi-benefit problems tend to get lost in between these competing objectives, and it is often hard to flex or combine such funds. The result is often sub-optimal spending on different bits of infrastructure, which routinely misses the chance to make many small improvements to places and people’s lives.
It’s important to stress that this is not just a problem of economic appraisal. Counting the benefits and making business cases for multi-benefit goods is normally fairly straightforward. The problem is pinning down someone to pay. When there is no dominant benefit, and no dominant beneficiary, it is not rational for anyone to pay without some kind of coordination. There is also the prospect of free-riding — hoping someone else pays, and you get the benefit without paying. In this respect, the multi-benefit problem can sometimes end up looking a little bit like a public good problem.
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What solutions are available to the multi-benefit problem? There is a market-based option, which is known as “stacking”. The aim is to create a coordinated framework where multiple different beneficiaries can pay their “share”, and combine these payments to fund the work.
For example: if you want to turn an acre of farmland into a wetland, you would aim to get the local water company to contribute some funding (because the wetland cleans the water), and perhaps the local flood authority to also contribute (for reduced flood risk). This money is combined and paid to the farmer to carry out the work. This stacking approach is at the heart of the government in England’s plan for funding farming and nature in future.
But stacking is challenging. How do you work out what share everyone should pay? This is complex, and if you want to calculate the benefits very closely, is expensive, adding big transaction costs (always, always ask about transaction costs in schemes like these). And how do you actually persuade people to pay rather than free-riding? Sometimes good will is enough, but sometimes regulation or some other compulsion is required, which isn’t always easy to put in place.
The other obvious option is for governments (and perhaps organisations) to have more explicitly multi-benefit funding schemes, which fund things with the highest overall benefits. This can work well for certain categories of multi-benefit spend, such as for tree-planting or home insulation. There is always a risk of introducing new kinds of siloes here though — for instance, funding trees but not hedgerows.
There is also the worry that multi-benefit schemes are too diffuse in their benefits, and it’s hard to be sure whether they really add up to meaningful objective which is deserving of public money. One solution to this is to run multi-benefit projects in strategic ways. If you put in place trees and wetlands over a whole river catchment, for example, you should be able to see the benefits it brings at scale.
It’s also worth saying — bias alert here! — that I think it easier to tackle multi-benefit problems at a local level. Local government is less likely to put in place major funding streams around one objective — it just doesn’t have the scale for that — and it is more typically able to plan strategically within its local area. You always need some kind of siloes in government, but sometimes a place can be the thing you organise around, rather than an objective. Given the big reduction in local government funding in the UK over the last decade and bit, perhaps it is no surprise to see complaints about many little things — captured as “Pride in Place” in the government’s Levelling Up Strategy — become a bigger political issue.
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I don’t know for sure, but I suspect that the multi-benefit problem crops up in many different spheres of life. It may apply within organisations as well as within public policy — it is not just governments that struggle to grapple with diffuse and diverse benefits. It is not always an easy problem to solve, but nor is it intractable — and I’d suggest that often the solution is easiest to find at a local level. I suspect that solving multi-benefit problems more routinely could open up a whole set of options for making our lives better, in many small ways.
