ANSWERS TO EXERCISES with Excel Solutions 4

1 ANSWERS TO EXERCISES with Excel Solutions (4 th Edition)

Cost-Benefit Analysis: Concepts and Practice

by Boardman, Greenberg, Vining and Weimer NOTE: (For Complete File, Download link at the end of this File) 1 / 4

2 Chapter 1 Exercises

• Imagine that you live in a city that currently does not require bicycle riders to wear

helmets. Furthermore, imagine that you enjoy riding your bicycle without wearing a helmet.

• From your perspective, what are the major costs and benefits of a proposed city

ordinance that would require all bicycle riders to wear helmets?b.What are the categories of costs and benefits from society’s perspective?

1.a. The most significant categories of costs to you as an individual are probably: the purchase price of a helmet, the reduced pleasure of riding your bicycle while wearing a helmet, diminished appearance when you take the helmet off (bad hair), and the inconvenience of keeping the helmet available. The most significant categories of benefits are probably: reduced risk of serious head injury (morbidity) and reduced risk of death (mortality).

1.b. There are a number of categories of costs and benefits that do not affect you (directly

or are insignificant), but which are important in aggregate. These are:

•program enforcement (a cost) •reduced health care costs (a benefit), although this may not be as high as one might expect if bicyclists ride more aggressively because they feel safer (this is called off- setting behaviour) •increased pollution, due to cyclists switching to cars (a cost) A social cost-benefit analysis would take account of these costs and benefits in addition to your costs.

• The effects of a tariff on imported kumquats can be divided into the following categories:

tariff revenues received by the treasury ($8 million); increased use of resources to produce more kumquats domestically ($6 million); the value of reduced consumption by domestic consumers ($4 million); and increased profits received by domestic kumquat growers ($5 million). A CBA from the national perspective would find costs of the tariff equal to $10 million-the sum of the costs of increased domestic production and forgone domestic consumption ($6 million + $4 million = $10 million). The increased profits received by domestic kumquat growers and the tariff revenues received by the treasury simply reflect higher prices paid by domestic consumers on the kumquats that they continue to consume and, hence, count as neither benefits nor costs. Thus, the net benefits of the tariff are negative (-$10 million). Consequently, the CBA would recommend against adoption of the tariff.a.Assuming the agriculture department views kumquat growers as its primary constituency, how would it calculate net benefits if it behaves as if it is a spender?b.Assuming the treasury department behaves as if it is a guardian, how would it calculate net benefits if it believes that domestic growers pay profit taxes at an average rate of 20 percent?

2.a. If the agriculture department behaved as if it were a "spender," then the benefits 2 / 4

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would probably be:

• $5 million domestic grower profits (“constituents”) • $8 million tariff revenue (income from foreigners, assuming a national perspective)

Total benefits: $13 million

Costs would be $4 million (reduced consumption)

Net benefits: $9 million.

A spender might treat the additional resources devoted to domestic kumquat production ($6 million) as a cost. This would be okay.

At the same time, a spender might also consider the $6 million (increased use of resources as a benefit if it were spent on a constituent group, such as labour. The description of the question implies that the growers are the primary constituency, thus I would lean towards the view that a spender would not treat the $6 million as a benefit. If the agriculture department behaved as if it were a "spender," then it might consider the increased prices paid by domestic consumers as a cost. However, again I would argue that the growers are the primary constituency and, therefore, a spender would probably ignore the increased prices paid by domestic consumers.

2.b. If the treasury department behaved as if it were a "guardian," then it would count only the costs and benefits accruing to the government. If so, benefits would equal $9 million ($8 million in tariff revenue and $1 million in profits tax) and costs would be zero, so that net benefits would equal $9 million.

• (Instructor-provided spreadsheet recommended) Your county is considering building a

public swimming pool. Analysts have estimated the present values of the following effects

over the expected useful life of the pool:

PV (million dollars)

State grant: 2.2

Construction and maintenance costs: 12.5

Personnel costs: 8.2

Revenue from county residents: 8.6

Revenue from non-residents: 2.2

Use value benefit to county residents: 16.6

Use value benefit to non-residents: 3.1

Scrap value: 0.8

The state grant is only available for this purpose. Also, the construction and maintenance will have to be done by an out-of-county firm.

• Assuming national-level standing, what are the social net benefits of the project?
• Assuming county-level standing, what are the social net benefits of the project?
• How would a guardian in the county budget office calculate net benefits?
• How would a spender in the county recreation department calculate net benefits? 3 / 4

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• The spreadsheet available from the instructor web page facilitates the following

estimates of net benefits (millions of dollars):

Social CBA Social CBA County County National Standing County Standing Guardians Spenders

-0.2 1.1 -6.9 8.9

We recommend that instructors delete the cell entries under these columns and distribute the spreadsheet to students. As this is a very simple use of a spreadsheet, it makes a good introduction for students who have not used them before.

As an alternative, instructors can distribute the spreadsheet as provided and give the students a different set of costs and benefits.

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