Environmental Economics 4th Canadian Edition By Field – Test Bank a+

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The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for five years following construction which takes place in year zero.

The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for seven years following construction which takes place in year zero.

The net benefits (measured in millions of dollars) for each option have been computed for two population growth scenarios: 1) zero population growth; and 2) higher population growth. The results for each of the two scenarios are summarized in the following table. The project lasts for five years following construction which takes place in year zero.

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In Canada benefit-cost analysis has not been officially legislated for use by either federal or provincial government agencies, but it has been used extensively in the United States.

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Net social benefits are maximized where MAC = MDC.

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Because of the potentially large impact on future generations, it is difficult to determine the appropriate discount rate for benefit-cost analysis so instead, we may wish to avoid projects that reduce the long-run productive capabilities of our natural and environmental resource base, as well as avoiding making decisions that are irreversible, or that preclude taking other options in the future.

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Horizontal equity treats people in the same circumstances identically.

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Cost-effectiveness analysis could omit lower cost possibilities if it does not include options with hard to measure costs.

There are four essential steps in conducting a benefit-cost analysis including: 1) prepare a clear overview of the project including specifics about scale and perspective; 2) estimate the social costs and benefits of the inputs and outputs of the project; 3) quantitatively describe the inputs and the outputs of the program; and 4) compare the benefits and costs of the project.

The three criticisms that have been made of benefit cost analysis include: 1) public agencies use benefit-cost analysis to justify increasing their budgets; 2) benefit-cost analysis is used to limit political discussion and decision-making about prospective public projects and programs; and 3) benefit-cost analysis is a way of limiting spending on public programs because of the difficulty of measuring benefits relative to costs.

The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for five years following construction which takes place in year zero.

The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:

Using the discount factors, we calculate the net present value (NPV) of each of the three options as follows:
NPV_E = -100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60) = 66.3
NPV_T = -50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35) = 91.7
NPV_S = -15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10) = 23.45
The municipality should choose the Tertiary option since it generates the highest net present value of the three choices.

The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:

Using the discount factors, we calculate the net present value (NPV) of each of the three options as follows:
NPV_E = -100 + .98(0) + .96(30) + .94(50) + .92(60) + .91(60) = 85.6
NPV_T = -50 + .98(25) + .96(35) + .94(35) + .92(35) + .91(35) = 105.05
NPV_S = -15 + .98(5) + .96(10) + .94(10) + .92(10) + .91(10) = 27.2
The municipality should choose the Tertiary option since it generates the highest net present value of the three choices.

The net benefits (measured in millions of dollars) for each option are summarized in the following table. The project lasts for seven years following construction which takes place in year zero.

The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:

Using the discount factors, we calculate the net present value (NPV) of each of the three options as follows:
NPV_E = -100 + .93(0) + .87(30) + .82(50) + .76(60) + .71(60) + .67(60) + .62(60) = 132.7
NPV_T = -50 + .93(25) + .87(35) + .82(35) + .76(35) + .71(35) + .67(35) + .62(35) = 129
NPV_S = -15 + .93(5) + .87(10) + .82(10) + .76(10) + .71(10) + .67(10) + .62(10) = 34.15
The municipality should choose the Enhanced Tertiary option since it generates the highest net present value of the three choices.

The net benefits (measured in millions of dollars) for each option have been computed for two population growth scenarios: 1) zero population growth; and 2) higher population growth. The results for each of the two scenarios are summarized in the following table. The project lasts for five years following construction which takes place in year zero.

The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:

Using the discount factors and the probabilities of each population growth scenario, we calculate the expected net present value (ENPV) of each of the three options as follows:
ENPV_E = .25[-100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60)] + .75[-150 + .95(-15) + .91(40) + .86(45) + .82(50) + .78(50)] = 40
NPV_T = .25[-50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35)] + .75[-100 + .95(-10) + .91(30) + .86(30) + .82(30) + .78(30)] = 36.25
NPV_S = .25[-15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10)] + .75[-30 + .95(10) + .91(15) + .86(15) + .82(15) + .78(15)] = 37.5
The municipality should choose the Enhanced Tertiary option since it generates the highest expected net present value of the three choices.

The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:

Using the discount factors and the probabilities of each population growth scenario, we calculate the expected net present value (ENPV) of each of the three options as follows:
ENPV_E = .75[-100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60)] + .25[-150 + .95(-15) + .91(40) + .86(45) + .82(50) + .78(50)] = 80
NPV_T = .75[-50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35)] + .25[-100 + .95(-10) + .91(30) + .86(30) + .82(30) + .78(30)] = 88.75
NPV_S = .75[-15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10)] + .25[-30 + .95(10) + .91(15) + .86(15) + .82(15) + .78(15)] = 32.5
The municipality should choose the Tertiary option since it generates the highest expected net present value of the three choices.

The discount factors are computed using the following relationship between the discount factor and the discount rate where t represents time:

Using the discount factors and the probabilities of each population growth scenario, we calculate the expected net present value (ENPV) of each of the three options as follows:
ENPV_E = .5[-100 + .95(0) + .91(30) + .86(50) + .82(60) + .78(60)] + .5[-150 + .95(-15) + .91(40) + .86(45) + .82(50) + .78(50)] = 60
NPV_T = .5[-50 + .95(25) + .91(35) + .86(35) + .82(35) + .78(35)] + .5[-100 + .95(-10) + .91(30) + .86(30) + .82(30) + .78(30)] = 62.5
NPV_S = .5[-15 + .95(5) + .91(10) + .86(10) + .82(10) + .78(10)] + .5[-30 + .95(10) + .91(15) + .86(15) + .82(15) + .78(15)] = 35
The municipality should choose the Tertiary option since it generates the highest expected net present value of the three choices.

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Although it is true that surveys are relatively easy to administer, they are also prone to bias since respondents will have incentives to misrepresent their true WTP for the environmental amenity. Other problems inherent with surveys include the biases of the creator of the survey questions, problems with small sample size and self-selection issues. These problems associated with the use of surveys make them a “disadvantage” of CVM.

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This explains why WTA measures tend to be higher than WTP.

The change in producer surplus will approximate the maximum that farmers will be willing to pay for the improved air quality. Initially, output will equal 7.5 units and producer surplus is equal to:
PS₁ = ½(60 – 45)7.5 = $56.25
After the marginal cost curve shifts, output will equal 30 and producer surplus is equal to:
PS₂ = ½(60 – 45)30 = $225
The difference between PS₂ and PS₁ will approximate the maximum amount the farmers will be willing to spend and this equals $168.75.

When 20 units are consumed, the price will be $95. Consumer surplus will be equal to the area of a triangle with height 10 and width 20 which is $100.

To calculate the change in consumer surplus, we first calculate the level of consumer surplus for each level of environmental quality and then we compute the difference between them. When EQ = 60 units, MWTP = $155 and consumer surplus will be the area of a triangle with height 90 and width 60 which is equal to $2,700. When EQ = 70 units, MWTP = $140 and consumer surplus will be the area of a triangle with height 105 and width 70 which is equal to $3,675. The change in consumer surplus is therefore equal to 3,675 – 2,700 = $975. Consumer surplus increases by $975 when EQ increases from 60 to 70 units.

The four methods that can be used to impute WTP include: 1) preventative or mitigating expenditures; 2) hedonic estimation; 3) surrogate markets; and 4) contingent valuation.

The three main criticisms of the travel-cost method include: 1) multi-purpose visits: if the site in question is not the only destination or if the main purpose of the trip is not recreational, it can be difficult to accurately assess what costs of travel are actually associated with the site; 2) utility/disutility of travel: travel costs may not actually be a good proxy for WTP for the site if the trip there is either highly enjoyable or very unpleasant; and 3) survey sample bias: this method only collects data from people who actually travel to the site even though others may still derive pleasure from knowing it is there, so their WTP will be missing from final estimates.

The main strength of CVM is its flexibility – the researcher has total control over what questions to ask and surveys tend to be inexpensive to administer. There are three main weaknesses of CVM including: 1) the hypothetical character of the questions: because people are being asked about their WTP for environmental amenities (i.e., goods without an actual market or price), it is hard for them to accurately assess what this actually is; 2) incentives to misstate WTP: people might understate WTP if they think this will result in lower taxes/prices for the good or they may overstate WTP since they know their actual share will be quite small; and 3) other practical problems with surveys: these could include bias of the analyst, small sample sizes; self-selection problems, etc.