Question

Problem Set 7 Cost-Benefit Analysis 1.) The Los Angeles area has long been plagued by urban smog. Suppose that one of several ozone-reducing policy options is being evaluated by economists using benefit-cost analysis. a. Since the policy will be implemented over time, economists assume that per resident benefits will accrue in increments of $500 (in real terms) at the end of each of the next three years. Find the present value of benefits (PVB) in nominal terms for each resident, assuming an annual inflation rate of 4% and a nominal annual discount rate of 9 % b. Assume there are 2 million adult residents in the Los Angeles area to whom the per-resident PVB would accrue. Also assume that the estimated present value of costs (PVC) for this policy option is $2 billion. Is this option feasible? Why or why not? Show your supporting calculations. H Focus R E

Answer 1

Given:- been plagud The les Angoy aua has long Lonban Smog, skppos the one of sevoal 02one- Sieducing benht policyoptiay is beirg evaluatis y economig sng cost arolyss a) ince the poliy usill be \mple menled oves ime ,eommig acceoe in in(oumats o so CTn Bealtomy And the Pyend valu ot benAt CPve) in nomüral domy. Arnual intlaon ah of 41 and romil annual discou Tati of 97 Hesu Nomural Annual beneft , yca 1500 Nbmiral Aal bene At, yean a = 500 x(1nfa bon Drad Nomia Annual beneAt yecor 3 $5ao x (1+Drflation at 3s0x104 su0.8 PvB C) 500 PIF(,) +5aox pIF(92) 45u0-8 xPIF( 9%13) 500X0.174t 5a0 x0 841 t540-8A6aa 458.40 u3.68 1.6o = , 313,98

b) Asume thou coe a milion adult Teidenin e to whom the pe- Sidlent PvB uoud acelou Los Angely aua eshimat Prcad valu of ca (vc) ot thy policy ophon is a billion. HOu To tal pvB : $ 1,313, q8A mullion = 9, 6a7,96 mllon PvC a billion $a000 milon Pregert Valu (NP)=(a,6a. 6-a000) million - $6A.96 mållio3 Net Since Npso, he ophon is feaible (i BenetcoSt aio of cLOOud ophon = $a,6,6 müllion / 2,00 millon 31 =Total pvB / pvc 8ince ceooud opton hay high ej enit ay oato ,thiy the most efficie nt

Answer 2

PVB Calculations 

 Nominal Conversion:  

   Year 1:  500(1.04)   =  $520.00 

   Year 2:  500(1.04)2   =  $540.80 

   Year 3:  500(1.04)3   =  $562.43 

 Inflation Correction: 

   Year 1:  $520.00/(1.09) =  $ 477.06 

   Year 2:  $540.80/(1.09)2   =  $ 455.18 

   Year 3:  $562.43/(1.09)3  =  $ 434.30 

 

   PVB      = $1366.54