Assume there are 2 million adult residents in the Los Angeles area to whom the per-resident PVB would accrue. Also assume that the estimated present value of costs (PVC) for this policy option is $2 billion. (i). Is this option feasible? Why or why not? Show your supporting calculations. (ii). If two other policy options have benefit-cost ratios of 1.23 and 1.05, can you determine which of the three is the most efficient? If so how? If not, why not?
The Los Angeles area has long been plagued by urban smog. Suppose that one of several ozone-reducing policy options is being evaluated by economists using benefit-cost analysis.
$1366.54 * 2,000,000 = $2,733,080,000. or $2.733 billion
(i). Feasibility test:
PVB/PVC = $2.733 billion/$2 billion = 1.37> 1 ? feasible
or PVB–PVC = $2.733 billion – $2.0 billion = 0.733 billion > 0 ? feasible
(ii). One cannot determine which of the three options is the most efficient because a benefit-cost ratio cannot be used to rank among feasible options. The reason is that there is uncertainty about whether to count an event as an increase in costs or a decrease in benefits, and the converse is true. The choice would affect the value of the ratio,which means that attempts to form a ranking on this basis would give ambiguous results. A valid ranking can be guided only by a benefit-cost differential, i.e., the PVNB.
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Which of the following describes how a positive externality affects a competitive market?
A) The externality causes a difference between the private benefit from production and the social cost of production. B) The externality causes a difference between the private benefit from consumption and the social benefit. C) The externality causes a difference between the social cost of production and the social cost of consumption. D) The externality causes quantity demanded to exceed quantity supplied.
When a transaction takes place repeatedly, then one way to signal to avoid information asymmetry is:
A. screening. B. statistical discrimination. C. building a reputation. D. Any of these could be true.
Although tariff and quota protections for China auto imports were very costly to consumers, which of the following was a benefit?
a. Auto prices, compared with other prices in the economy, actually fell. b. Auto consumption skyrocketed, but there were environmental effects. c. Firms that were involved in joint ventures were able to "learn" and to significantly lower their costs. d. China's government realized it had to keep its hands off entrepreneurial concerns.
The aggregate production function relates total national output to:
A. inputs and outputs. B. inputs and technology. C. employment and growth. D. the production possibilities frontier. E. inflation and economic growth.