Application 1 (application 10.0 in your textbook) As an aid to Governor, you are

Question

Application 1 (application 10.0 in your textbook)
As an aid to Governor, you are given the task of recommending whether or not the state should locate a low-level nuclear waste facility in a rural county. The nuclear industry provides you with a cost-benefit study they've conducted that gives you the following information:

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COST-BENEFIT SUMMARY FOR PROPOSED WASTE FACILITY

Prepared by the Center for the Objective Study of Nuclear Issues

Conclusion: The project will result in Net Benefits of $3 billion, with a benefit-cost ratio of 13. While these figures, of course, depend on the assumptions of the study, the very large Net Benefit figure, along with the extraordinarily high benefit-cost ratio both indicate that the project will remain attractive under most plausible assumptions. We, therefore, strongly recommend initiating the proposal.

Assumptions:
1. Discount rate of 10%.

2. Principal costs:
a. worker exposure.

b. risk of accidental exposure during transport.
c. reduction to zero of the land value at the storage site. d. construction and maintenance.

3. Principal benefits:
a. reduced exposure at current temporary storage sites.
b. job creation -- 1,000 temporary, 200 permanent jobs.
c. extends life of existing nuclear power plants by ten years --

i. lower electricity costs for consumers ii. saves 7,000 jobs

d. increased profits for local service industries

Note: Benefits under point b. and cii. are given double weight, due to high unemployment in the county.

4. Risk Assessment:
i. exposure/fatality assumptions from the US

Department of Energy.
ii. probability of fatal exposure due to transport accident:

1/100,000,000 miles. Source -- US Department of Energy. iii. value of a statistical life: $1 million.

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1. Do you believe the report?

2. See if you can find 6 separate problems with the study.

3. What further information you would like to have prior to making a recommendation to the governor?

Explanation / Answer

1. Students should justify their answers; be it yes or no

2. Here are 9

a. Study was not sponsored by a highly partisan source.

b. Magnitude of B/C ratio is not meaningful, since benefits may show up as negative costs. Example: This facility has alleged net benefits of 3b, and a B/C ratio of 13. A bit of algebra (which you don't need to worry about) tells us that benefits must be 3.25 b, with costs of .25b. Suppose instead we had lumped all worker exposure under the heading of costs, with total exposure costs being: Increased exposure at new site (.02b) decreased exposure at old (.01b) =.01b. This reshuffling would keep the net benefits figure the same at 3.5b, but would change the BC ratio (3.25 .01) / (.25.01) > 13. Moral: BC ratio can be padded through accounting changes, while the net benefit figure won't change.

c. Discount rate is too high. Unless an environmental bond is being set up, the sustainable discount rate is the rate of growth of NNW, at most 2%.

d. Omitted cost: health risk / impact on property values around the site.

e. Throw out the employment benefits new jobs are likely to be matched by layoffs at existing facilities; temporary workers will probably come from outside the county; not all permanent workers would otherwise be unemployed.

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