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Resource Economics 262 Problem Set 4 15 points Due March 18 2021 4 pm Two versions of this assignment are posted a Word version and a pdf version You may either 1 type your answers directly on the Word version convert that to a pdf and submit the pdf version or 2 write your answers on a separate document convert that to a pdf and submit the pdf You must submit a pdf copy Do not simply cut and paste material from my lectures Please include your name and your student ID number on your submission Also name the file you submit your full name RESECON262HW 3 pdf Please make sure that you upload and submit your assignment when you are done Warning for MAC users Graphs in this assignment may not convert correctly if you download the MSWord version of this document with a program other than Microsoft Office I believe you can install a free version of Microsoft Office through UMass IT Alternatively you can download the pdf version of the assignment write your answers in a separate document convert that to pdf and submit that document Note Most of the questions in this assignment come from Unit 5 The last question comes from Unit 6 1 1 Below are the estimated benefits and costs of a proposed policy to reduce emissions from non road diesel engines Use this information to answer questions 9 and 10 1 1 Would the proposed policy be an improvement over the current situation Explain why or why not 2 points This would be an improvement 43 1 385 31 05 This means for every dollar spent of the reduction of emissions would yield 31 dollars in benefits So this is an improvement 1 2 Is the policy efficient Yes no or can t tell Explain 2 points Just because this policy is an improvement doesn t mean that it is necessarily efficient The high benefit cost ratio is not necessarily what is required For these reasons we can t really tell given the information if this policy is efficient or not 2 Sometimes the results of a benefit cost analysis are expressed as the ratio of benefits to costs Doing so allows the analyst to make statements like The benefit cost ratio is 3 indicating that every dollar spent on the policy yields 3 00 in benefits Is the following statement true or false Explain your answer 2 points A policy for which the benefit cost ratio is 3 is more efficient than a policy for which the benefit cost ratio is 2 False As stated before just because a policy has a high benefit cost ratio does not mean that it is the most efficient it just means it is an improvement What determines whether or not a policy is efficient is cost effectiveness 3 Explain why we calculate the present values of the costs and benefits of environmental policies that occur at different times in the future 3 points 2 To evaluate any benefits cost you have to think about the future Discounting is known as applying a discount factor to future values in order to convert them to present values Discounting acts like a dynamic analysis There are three reasons for why we discount future benefits and costs The first reason is capital market interest rates The second reason is personal time preference or personal discount rates reflecting impatience Finally the last reasons is discounting for future risk 4 Calculate the present value of the following sequence of willingness to pay 150 this year 150 next year 150 in year 2 and 50 in year 3 Use a 5 discount rate Recalculate using an 3 discount rate Show your work What is the effect of using a lower discount rate on the present value of the stream of willingness to pay 3 points Cash flow now 150 Cash flow at 1st year 150 Cash flow at 2nd year 150 Cash flow at 3rd year 50 Using 5 interest rate present worth PW would be PW 150 150 P A 5 2 50 P F 5 3 PW 150 150 1 85941 50 0 86384 472 10 Using 3 interest rate present worth PW would be PW 150 150 P A 3 2 50 P F 3 3 PW 150 150 1 91347 50 0 91514 482 77 When the discount rate is decreased the present value of the cash flows is increased It otherwise means a lower rate of interest will increase the present value of the cash flows 5 Consider an air pollutant to which 300 million people are exposed The current annual mortality risk from exposure to the pollution is 1 in 150 000 A policy to reduce emissions of the pollutant is expected to cut this risk in half to 1 in 300 000 A study reveals that the average willingness to pay for this mortality risk reduction is 20 per person per year What is the implied value of a statistical life Explain how you got your answer 3 points Population is equal to 300 Million people The current deaths are 1 in 150 000 or 2 000 000 deaths in 300 million people After the policy implementation the risk is reduced to 1 in 300 000 or 1 000 000 in 300 million people This means that in order to save 1 000 000 statistical lives people are willing to pay 20 dollars each The total amount which people will pay to save 1 000 000 lives is 20 300 million Value of 1 life 20 300 million 1 000 000 The implied value of a statistical life is 6000 3

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UMass Amherst RES-ECON 262 - Problem Set #4

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