1、Chapter 11 Cost-Benefit Analysis41Chapter 11 Cost Benefit Analysis1. Yes, one really must ask these questions, although it may seem distasteful. Otherwise, there is no way to determine which safety precautions are sensible.2. The increased time spent at the inspection must be counted as a cost of th
2、e program. One reasonable way to estimate the value of the time would be to use the average wage rate in the state, and multiply this by the incremental waiting time of 105 minutes.3. The present value of $25/.10 = $250.The present value of the perpetual annual benefit = B + B/(1 + r) + B/(1 + r)2 +
3、 = B (r + 1 - r)/r = B/r.4. a. 1,000=80/=.08b. If the money comes from consumer spending, use after-tax rate of interest as the discount rate:80 - 1,000 = 600 0.05The project is admissible.If the money comes from investment, use before-tax rate of interest as the discount rate:80 - 1,000 = -200 0.10
4、The project is not admissible.In the “mixed case,” for a discount rate, take a weighted average: .6 x 10% + .4 x 5% = 8%.80 - 1,000 = 0.08There is no net advantage to undertaking the project.c. Benefits = 80/.04 = 2,000. Present value of project = 2,000-1,000=1,000.d. If inflation is fully anticipat
5、ed, and if market interest rates increase by 10 percentage points, nothing changes in real terms.5. a. Bill is willing to pay 25 cents to save 5 minutes, so he values time at 5 cents per minute. The subway saves him 10 minutes per trip, or 50 cents. The value of 10 trips per year is $5. The cost of
6、each trip is 40 cents, or $4 per year. The annual Part 2 Analysis of Public Expenditure42net benefit to Bill is therefore $1. The present value of the benefits = $5/.25 = $20; the present value of the costs is $4/.25 = $16.b. Total benefits = $20x55,000=$1,100,000.Total costs = $16x55,000 = $880,000
7、.Net benefits = $220,000.c. Costs = $1.25 x 55,000 = $68,750.Benefits =($62,500/1.25) + ($62,500/1.252) = $90,000.Net benefit = $21,250.d. The subway project has a higher present value. If a dollar to the “poor” is valued the same as a dollar to the “middle class,” choose the subway project.e. Let =
8、 distributional weight. set220,000 = -68,750 + (62,500/1.25) + (62,500/1.252) = 3.21This distribution weight means that $1 of income to a poor person must be viewed as more important than $3.21 to the middle class for the legal services to be done.6. The report for the Czech government that simply c
9、omputed the savings to the government for retirees from smoking is inadequate. After all, if one simply counts as “benefits” money saved from transfers, then having all of the retirees die would be considered an enormous benefit. What this analysis obviously missed is the “value of life.” If one com
10、puted the value of a life simply based on lost earnings, however, the retirees would suffer no loss. As the textbook mentions on page 255, this method is rejected by most economists. The method that is frequently used by economists is the “value of a statistical life,” which (among other things) com
11、pares compensating wage differentials to the probability of death. Viscusi and Aldy (2003) find that the value of statistical life ranges between $4 million and $9 million. One could convert these values from a lifetime into each year of life, to form some estimate of the “cost” of smoking.7. As dis
12、cussed on pages 257-8 of the textbook, one of the “games” that cost-benefit analysts play is viewing the wages paid to labor as a benefit not a cost. This is clearly wrong. The fact that 1,000 people need to be hired to do the recycling in New York is a cost of the program, not a benefit.8. Currie a
13、nd Gruber (1996) find the cost of the expansion per life saved was approximately $1.6 million. According to Viscusi and Aldy (2003), the value of a statistical life is between $4 million and $9 million. If all of these calculations are correct, then the Medicaid expansion passes a cost-benefit test.
