Question

Explain graphically, for the case of a continuous environmental harm, the validity of cost/benefit analysis. That is assume there is a continuous variable called environmental quality. There are two functions, a concave total benefits function and a convex total costs function. Graph these functions. Show graphically the quan- tity that maximizes net benefits. Find the relationship between marginal costs and benefits at this level. In general what assump- tions are implicit in such an analysis? What role does cost-benefit analysis play in the current regulatory environment? What diffi- culties are there in implementing cost/benefit analysis? Are there some contemporary policy issues in which the theory behind cost- benefit analysis is more likely to be relevant, i.e. cases where there are less likely to be philosophical objections?

Answer 1