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Final Exam: ECO 3149 ‐ COST BENEFIT ANALYSIS

Instructions: 

Class, you have 2 sections to complete on this exam. For Section A, you need to answer one of two questions.  For Section B, you need to complete 4 of 6 only. For section A, the question is worth 50 marks. For Section B each question is worth 12.5 marks. This is a 3 hour exam.  Please label questions, answers and pages accordingly. Good luck!  

Part A:

Question 1:

Question 2. 

You have heard much conversation about the war on climate change.   Existing laws in the United states and amongst the biggest polluters have not resulted in a reduction in world temperatures given our carbon footprint has not be reduced sufficiently.  A new law and a package of incentives is being introduced around the world that makes the introduction of clean technology more abundant.  While the introduction of tax incentives and other measures will cost a lot of money, the benefits of a cleaner world are important as well.   

Many on the right say that such laws that bring in rules that create potentially a cleaner environment is too expensive on companies and hurts the economy too much.  Those who want the cleaner environment want the laws to change, arguing no costs should be spared to get a clean environment as our vary survival depends on it.  

Please think of a government program (laws and a suite of incentives) that brings about a cleaner environment.  Look at the benefits and costs that you think would exist and compare it to the status quo.  Then use the tools of CBA to take a position.  Identify direct and indirect costs and benefits and use the tools discussed in class to address this issue.  Any assumptions need to be stated and costs and benefits can/should be based on sound hypotheticals (though you can use the internet to find data).  Which side is right and how will you frame this via a short report to convince a skeptical audience?  Give me a short report.

Question 2.  

You are the minister of defense for a small Caribbean island.  You are asked to secure some fighter jets for your air force.  You want to secure planes that accomplish tasks A, B and C.  You are going to tender this out to 4 defense companies.   What do you do to evaluate the project?  Do you use CBA analysis, if so how?  If you do not use a CBA analysis what approach do you revert to?  If you don’t use CBA analysis what are the pros and cons of your new approach?

Part B (Each worth 12.5%):   

1. Please outline how we determine discount rates on private versus public projects?  How do these rates range and why?    When could we ever expect social discount rates to be higher than private discount rates?

2. Discuss the issue of equality/fairness and how it is dealt with when comparing private versus pubic CBA analysis?  Why is distribution of benefits and costs so important when performing a public/private sector CBA?  What are the key principle in the economics of CBA that we use to discuss redistribution of gain issues?  Are we able to make things parato efficient within a CBA setting?  Be as clear as possible.

3. What is cost of life in CBA and how do we compute it?   Why is it different for different age groups and across countries?  How would you compute  “cost of life”?  Why is the cost of life higher for younger people and for children from better socioeconomic backgrounds?  Show this by discussing quantitative and qualitative factors.   How would you go about pricing cost of life?  Is your answer the same across countries?  

4. If CBA is not right for evaluating a project what are some other ACCEPTABLE methods for doing it?  What are the pros and cons of these alternatives?  Please explain fully.

5. What are  some intangibles to consider within a cost benefit analysis and how do you value them?   Give examples and show why not considering intangibles in your analysis can drastically impact your analysis.

6. If costs and benefits do not have a given monetary value, what are some ways you can put a value on a costs or benefits?  Give examples and clearly show how your approach works to get the “price”.