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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:

You have been tapped by the Minister of Finance in South Sudan.  You are asked to set up a regulatory regime that seeks to move the economy forward on big ticket projects/initiatives while moving the economy towards sustainability and market efficiency.  As the Minister of Finance, you have the power and budget to set up a system that effectively assesses government projects but you want one that is also transparent.  You understand how government projects need to be evaluated and conveyed to the broader pubic in a democracy and you hope to apply the same principles, standards and best practices in South Sudan.  However, South Sudan is different in that it is not a democracy and there is political conflict between various groups in the country.

Please provide an overview of how the government should access projects from both an economic, political and social perspective.  What would you like to see in a cost benefit analysis and are there any “rules of thumb” that government agencies can refer to when doing a cost benefit analysis?  Also, how can you make the process more transparent and equitable for everyone?   While conducting a CBA and keeping people informed is one part of your task, what would you like to see changed within the government structure that would make the application of a CBA and effective implementation of it more efficient in the future?  How does this issue of the country not being a true democracy make this a complicating issue?  Use as many examples as possible.

Question 2.  

You have heard much conversation about the US infrastructure bill.  This law was passed and will spend 1 trillion dollars on improving, maintaining and upgrading critical infrastructure like roads and bridges.  Many on the right say that such expenditure is not worth it and that the United States will need to borrow the money to do it.  Given debt in the US is at record highs, they point to record indebtedness as a reason to not do it.  Those who want to do it say this policy will serve to help improve the economic outlook for the US for years to come.  Please 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.

Part B (Each worth 12.5%):   

1. The concept of risk is very important when performing a cost benefit analysis for regulatory reasons.  Discuss  the many ways that risk must be incorporated into a cost benefit analysis.  Be sure to (In your answer) discuss risks associated directly and indirectly when doing the project.  Be as expansive as possible. 

2. Discuss the issue of externalities within the context of a cost benefit analysis.  Discuss what they are and why they are important to consider.  How are they incorporated into a CBA and why must we consider them in order to achieve market efficiency and the stated goal of project sustainability?

3. Cost benefit analysis requires that we put a cost or monetary value on certain things.  While direct costs and benefits are easy, please discuss how we might put a value on non-market costs and benefits.  Provide some examples.   One thing that often comes up in our analysis is the ideas of  “cost of life”.  While it goes without saying that the value of life is “priceless” regulatory bodies routinely put a value on it.  What are some of the ways that various government bodies estimate the cost of life?  Do all values tend to one number but within a country (say between agencies) or even between countries?  Why or why not?   How does this make the process of cost benefit analysis more difficult?  How do you mitigate the risks of these differences?  

4. Consider the fiscal imbalance currently facing the government of Canada with an economy characterized by low interest rate with rising inflation.  What do you think the prospects of big-ticket government projects are and how might this change with rapid inflation and desires to cut government deficits in the future?  How do these facts make it more imperative to do an effective cost benefit analysis?  Explain in as much detail as possible.

5. Cost benefit analysis looks at issue of direct and indirect benefits and costs when assessing the best project to take.  How do the issues of intangibles come into play?  In your estimation how do we account for the presence of intangibles and how do we put value on it?  Give some examples and some approaches  Do you think the issue of intangibles has/will become more pronounced in this economy?  Why or why not?  Give examples in your answer.

6. How does politics impact the issue of cost benefit analysis from a regulatory perspective?  How does this issue impact the ability of a government intervention to achieve parato  efficiency?  Explain fully with examples?  Does it matter if we are talking about a democracy versus a non-democratic government with differing market institutions?  Explain.