Thanks Debate Over the Cross-State Air Pollution Rule (CSAPR) The aim of CSAPR i

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Debate Over the Cross-State Air Pollution Rule (CSAPR) The aim of CSAPR is to reduce nitrogen oxide (NOx) emissions from electric generating units. Suppose the EPA estimates that the projected environmental benefits of the rule will increase over five years according to the following table: Electric utilities are concerned that the costs will far outweigh these benefits. For now, ignore the concern that these benefits may be overestimated, and answer the following questions: Using 3%, 5%, and 10% discount rates, calculate the net present value of the benefits above (show all of your calculations). Edison Electric Institute, a trade association for the electric power industry, announces at a news conference that the regulation's total costs of $5.5 billion dollars outweigh the $5.0 billion dollar net present value of its benefits. What discount rate are the companies using? Do you agree with them? Why or why not? Greenpeace weighs in on the debate, claiming that in this situation discounting is ridiculous because it weights a dollar's worth of future environmental benefits less than a dollar's worth of benefits today. Why might such an argument resonate with environmentalists? Does it make economic sense?

Explanation / Answer

a)NPV 3% discount=-5.5+(0.5*0.97)+(1*0.97^2)+(1.5*0.97^3)+(2*0.97^4)+(2*0.97^5)=0.783billion

NPV 5% discount=-5.5+(0.5*0.95)+(1*0.95^2)+(1.5*0.95^3)+(2*0.95^4)+(2*0.95^5)=0.34billion

NPV 10% discount=-5.5+(0.5*0.9)+(1*0.9^2)+(1.5*0.9^3)+(2*0.9^4)+(2*0.9^5)= -0.653 billion

b)5=(0.5*x)+(1*x^2)+(1.5*x^3)+(2*x^4)+(2*x^5)

x=0.908

discount=1-x=0.092=9.2%

c)yes

benifits in future are surely going to be better than today

dollar value may deteriorate but value of benefits DOESNOT

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