1. Imagine that you live in a city that currently does not require bicycle riders to wear helmets. Furthermore, imagine that you enjoy riding your bicycle without wearing a helmet.
a. From your perspective, what are the major costs and benefits of a proposed city ordinance that would require all bicycle riders to wear helmets?
b. What are the categories of costs and benefits from society’s perspective?
2. The effects of a tariff on imported kumquats can be divided into the following categories: tariff revenues received by the treasury ($8 million), increased use of resources to produce more kumquats domestically ($6 million), the value of reduced consumption by domestic consumers ($13 million), and increased profits received by domestic kumquat growers ($4 million). A CBA from the national perspective would find costs of the tariff equal to $19 million – the sum of the costs of increased domestic production and forgone domestic consumption ($6 million + $13 million). The increased profits received by domestic kumquat growers and the tariff revenues received by the treasury simply reflect higher prices paid by domestic consumers on the kumquats that they continue to consume and, hence, count as neither benefits nor costs. Thus, the net benefit of the tariff is negative (-$19 million). Consequently, the CBA would recommend against adoption of the tariff.
a. Assuming the Agriculture Department views kumquat growers as its primary constituency, how would it calculate the net benefit if it behaves as if it is a spender?
b. Assuming the Treasury Department behaves as if it is a guardian, how would it calculate the net benefit if it believes that domestic growers pay profit taxes at an average rate of 20 percent?
3. (Spreadsheet recommended) Your municipality is considering building a public swimming pool. Analysts have estimated the present values of the following effects over the expected useful life of the pool:
The national government grant is only available for this purpose. Also, the construction and maintenance will have to be done by a non-municipal firm.
a. Assuming national-level standing, what is the net social benefit of the project?
b. Assuming municipal-level standing, what is the net social benefit of the project?
c. How would a guardian in the municipal budget office calculate the net benefit?
d. How would a spender in the municipal recreation department calculate the net benefit?
1. Many experts claim that, although VHS came to dominate the video recorder market, Betamax was a superior technology. Assume that these experts are correct, so that, all other things equal, a world in which all video recorders were Betamax technology would be Pareto-superior to a world in which all video recorders were VHS technology. Yet it seems implausible that a policy that forced a switch in technologies would be even potentially Pareto improving. Explain.
2. Let’s explore the concept of willingness to pay with a thought experiment. Imagine a specific sporting, entertainment, or cultural event that you would very much like to attend – perhaps a World Cup match, a concert, or an opera.
a. What is the most you would be willing to pay for a ticket to the event?
b. Imagine that you won a ticket to the event in a lottery. What is the minimum amount of money that you would be willing to accept to give up the ticket?
c. Imagine that you had an income 50 percent higher than it is now, but that you didn’t win a ticket to the event. What is the most you would be willing to pay for a ticket?
d. Do you know anyone who would sufficiently dislike the event that they would not use a free ticket unless they were paid to do so?
e. Do your answers suggest any possible generalizations about willingness to pay?
3. How closely do government expenditures measure opportunity cost for each of the following program inputs?
a. Time of jurors in a criminal justice program that requires more trials.
b. Land to be used for a nuclear waste storage facility that is owned by the government and located on a military base.
c. Labor for a reforestation program in a small rural community with high unemployment.
d. Labor of current government employees who are required to administer a new program.
e. Concrete that was previously poured as part of a bridge foundation.
4. Three mutually exclusive projects are being considered for a remote river valley: Project R, a recreational facility, has estimated benefits of $20 million and costs of $16 million; project F, a forest preserve with some recreational facilities, has estimated benefits of $26 million and costs of $20 million; project W, a wilderness area with restricted public access, has estimated benefits of $10 million and costs of $2 million. In addition, a road could be built for a cost of $8 million that would increase the benefits of project R by $16 million, increase the benefits of project F by $10 million, and reduce the benefits of project W by $2 million. Even in the absence of any of the other projects, the road has estimated benefits of $4 million.
a. Calculate the benefit–cost ratio and net benefits for each possible alternative to the status quo. Note that there are seven possible alternatives to the status quo: R, F, and W, both with and without the road, and the road alone.
b. If only one of the seven alternatives can be selected, which should be selected according to the CBA decision rule?
5. An analyst for the US Navy was asked to evaluate alternatives for forward basing a destroyer flotilla. He decided to do the evaluation as a CBA. The major categories of costs were related to obtaining and maintaining the facilities. The major category of benefit was reduced sailing time to patrol routes. The analyst recommended the forward base with the largest net benefits. The admiral, his client, rejected the recommendation because the CBA did not include the risks to the forward bases from surprise attack and the risks of being unexpectedly ejected from the bases because of changes in political regimes of the host countries. Was the analyst’s work wasted?
6. Because of a recent wave of jewelry store robberies, a city increases police surveillance of jewelry stores. The increased surveillance costs the city an extra $500,000 per year, but as a result, the amount of jewelry that is stolen falls. Specifically, without the increase in surveillance, jewelry with a retail value of $900,000 million would have been stolen. This stolen jewelry would have been fenced by the jewelry thieves for $600,000. What is the net social benefit resulting from the police surveillance program?
7. (Spreadsheet recommended.) Excessive and improper use of antibiotics is contributing to the resistance of many diseases to existing antibiotics. Consider a regulatory program in the United States that would monitor antibiotic prescribing by physicians. Analysts estimate the direct costs of enforcement to be $40 million, the time costs to doctors and health professionals to be $220 million, and the convenience costs to patients to be $180 million (all annually). The annual benefits of the program are estimated to be $350 million in avoided resistance costs in the United States, $70 million in health benefits in the United States from better compliance with prescriptions, and $280 million in avoided resistance costs in the rest of the world. Does the program have positive net benefits from the national perspective? If not, what fraction of benefits accruing in the rest of the world would have to be counted for the program to have positive net benefits?
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