Resources & Environmental Economics EC307

Lekima Nalaukai Semester II, 2020

Tutorial 6 Questions
Week 9 – Chapter 9 – Callan et al (2013)
Section A: Multiple Choices
1. Present value determination is a procedure that
A. accounts for the opportunity cost of money
B. adjusts for changes in the general price level
C. discounts a present value into its future value
D. compares the present value of benefits to the present value of costs

2. The present value of benefits (PVB) is found as

A. the discounted value of benefits for a single period without adjusting for inflation
B. Σ(bt/[1+rs]t), with bt = Bt/(1 + p)t
C. Σ(bt/[1–rs]t), with bt = Bt/(1 + p)t
D. Σ(bt/[1+rs]t), with bt = Bt/(1 – p)t

3. In a benefit-cost analysis, the determination of feasibility

A. can be made by finding out if PVB/PVC is greater than unity
B. is not critical and therefore is an optional step
C. can be accomplished by finding out if PVNB is greater than zero
D. (a) and (c) only

4. In order for a policy option to achieve allocative efficiency,

A. PVNB must be maximized
B. PVB must be minimized
C. PVC must be minimized
D. (PVB – PVC) must be minimized

5. Among the chief concerns about the use of benefit-cost analysis is that
A. monetizing the benefits of a policy proposal is difficult
B. identifying and estimating implicit costs is a major challenge
C. equity might not be achieved if, for example, costs are distributed unevenly
D. all of the above

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Resources & Environmental Economics EC307
Lekima Nalaukai Semester II, 2020
Tutorial 6 Questions
Week 9 – Chapter 9 – Callan et al (2013)
Section B: Review of the Basics
1. Discuss 3 ways of how the impact of human activities on the environment can be assessed.

2. Though CBA is an important tool for project evaluation. There are some issues that are involved.
Discuss some of these issues.

3. Outline the differences between a CBA, risk analysis, cost-effectiveness and cost efficiency, and
environmental impact analysis (EIA).

4. The CBA can be performed any time, before (ex-ante), during or after (ex-post) a project is performed
and therefore serving different purposes when it is performed at different times. Discuss the
purposes of conducting CBAs ex-ante, during the project life and ex-post.

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Resources & Environmental Economics EC307
Lekima Nalaukai Semester II, 2020
Tutorial 6 Questions
Week 9 – Chapter 9 – Callan et al (2013)
Section C: Calculations
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.
i. Is this option feasible? Why or why not? Show your supporting calculations.

2. Suppose industry abatement costs rise from $850 million in 2011 to $1,000 million in 2012 in nominal
terms and that the CPI is 100 in 2011 and 106 in 2012.
A. Evaluate the change in costs over the period in real terms, first in 2011 dollars and then in 2012
dollars.
B. Are your answers the same? Explain why or why not.