Question Description

1.Explain briefly what the following mean:

a.Cost benefit analysis

b.Economic impact analysis

c.Cost effectiveness analysis

d.Hedonic pricing

e.Shadow pricing

2. Should decisions about natural resource policy be made based on cost-benefit analysis?

3.The Department of Natural Resources is planning a program for protecting a wilderness area and has evaluated three options (labelled A, B, and C below) using cost-benefit analysis techniques. Some of the results are presented in the following table:

Option
ABC
Total benefits$68 957$63 757$24 325
Total costs$6 272$4 156$3 655
Benefit to cost ratio11.015.36.7
Marginal benefit (MB)$5 192$39 440$24 325
Marginal cost (MC)$2 117$500$3 665
MB to MC ratio2.578.86.67


The monetary values in the table above are in millions of 2000 Canadian dollars, based on a 20 year life and discounted to present value using a discount rate of 3%. Option A is the strictest standard and Option C is the least strict. Option B is intermediate. The marginal costs and benefit figures refer to incremental costs/benefits involved in moving from no protection to Option C, from Option C to Option B and from Option B to Option A respectively.

a.The department of Natural Resources has selected Option B. Is Option B the economically efficient choice? Explain your answer in detail.

b.Under what circumstances would you recommend Option C ?

4.A fixed amount of a mineral (Q) is available for consumption in period 1 (q1) and/or period 2 (q2). The demand functions for the mineral in each period are the same and are given by and where and are the prices for the mineral in each period. Assume that the marginal extraction cost is zero.

a.Calculate the equilibrium price and quantity in each period if Q = 180, the discount rate used by the suppliers of the mineral is 10 % per year, and the suppliers of the mineral behave competitively (i.e. they are price takers).

b.Calculate the equilibrium price and quantity in each period if Q = 180, the discount rate used by the suppliers of the mineral is 20% per year, and the suppliers of the mineral behave competitively (are price takers).

c.How would an increase in the interest rate to 20% in (b) affect your answer and why?

d.Calculate the equilibrium price and quantity in each period if Q = 180, the mineral supplier is a monopoly who owns the entire resource and uses a discount rate of 10% per year.

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