(10 points) Cost Benefit Analysis - You are working for the EPA to assess two re

Question

(10 points) Cost Benefit Analysis - You are working for the EPA to assess two recycling programs for urban areas. Let's assume we have only 3 periods (t = 0, 1, 2). Policy A would cost $1 million in the first year (t = 0) and provide $3 millions in benefits for each of the three years (t = 0, 1, 2). Policy B would cost $3 millions in the first year (in t = 0) and provide $4 millions in benefits for each of the three years (t = 0, 1, 2).

If the discount rate is 10 percent, what are the present net benefits for the two policies?

Which regulation should be passed based on a benefit-cost analysis, A or B?

Why choosing a discount rate matters?

Discuss benefits and possible shortcomings of Cost Benefit analysis in assessing the

feasibility of environmental policies.

Explanation / Answer

present net benefit of 2 policies given as below

policy A

Policy B

b) Policy b should be follow in terms of higher benefit.

c) Higher the discount rate lower the present value and lower the discount rate, higher the present value.

year (COST)/Income at year end discount Rate@10% Present Value 0 -1 1 -1 1 3 0.91 2.73 2 3 0.82 2.48 3 3 0.75 2.25 NPV 6.46

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