Unformatted text preview:

Resource Economics 262Problem Set #4, 15 pointsDue: 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 upload2and2submit 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 can2downloadthe pdf version of the assignment, write your answers in a separate document, convert that to pdf and submit that document.2Note: 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 doesnot mean that it is the most efficient it just means it is an improvement. Whatdetermines 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]2To 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 1st2year = $150  Cash flow at 2nd2year = $150  Cash flow at 3rd2year = $50Using 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) = $472.10Using 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) = $482.77When 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 in300 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 / 1,000,000The implied value of a statistical life is =

View Full Document

UMass Amherst RES-ECON 262 - Problem Set #4

Documents in this Course
Load more
Download Problem Set #4
Our administrator received your request to download this document. We will send you the file to your email shortly.
Loading Unlocking...

Join to view Problem Set #4 and access 3M+ class-specific study document.

We will never post anything without your permission.
Don't have an account?
Sign Up

Join to view Problem Set #4 2 2 and access 3M+ class-specific study document.


By creating an account you agree to our Privacy Policy and Terms Of Use

Already a member?