Exam 10: Public Sector Decision Making

Which of the following requires the use of BCA instead of financial analysis?

The Department of Public Works has $1.1 million to allocate amongst several public projects. Data on these projects are presented in the following table: Using a MARR of 15%, rank the projects by their BCR, and comment on the most efficient way to allocate $1.1 million.

The hedonic price method is a way of setting a value on a social good based on

Give at least two reasons for public decision making

What economic conditions underlie market failures?

The City of Angels is considering two transportation projects to address its traffic congestion. The first one is a light-rail system while the second one is a new highway. Some economic data on both are presented below: In addition, the expected benefits from reduction in air pollution are $20 million per year in the case of the light-rail system and $21 million per year in the case of the highway. Service lives of the two alternatives are 50 years. Assuming a 10% MARR as suggested by the Canadian Treasury Board for public projects, which project is preferred? Does your conclusion change under 5% and 15% MARR?

Give two examples of monetary incentives/disincentives

One of the following is a fundamental limitation of BCA. Which one?

A municipality has just spent $8 million to build a second bridge across the city river to handle the increased traffic between two sides of the river. City engineer calculated that the bridge construction would allow a reduction in the travel time for the road users over the 25-year period of the bridge's service life with a present value of $15.5 million. The construction would lead to a decrease in the present value of surrounding property by $6.4 million over the bridge's service life. The present worth of the operation and maintenance of the bridge over its service life is $3.5 million. What is the benefit-cost ratio of the project?

Which of the following is an advantage of the modified benefit-cost ratio as compared with the conventional benefit-cost ratio?

Which of the following is viewed as direct costs?

What is the name for a market dominated by a single provider?

An environmental tax is an example of

A provincial government's Department of Tourism has estimated that initial investment into a new permanent recreational park in the province is $2 million, and annual upkeep costs are $100 000. As well, a survey of potential visitors detected a $330 000 annual value of the park via willingness to pay measure. However, an increased inflow of tourists into the area will cause $40 000 per year of extra air pollution. Assuming a social discount rate of 10% per year, calculate (a)the conventional BCR and (b)the modified BCR.

A city council is planning to build a new bridge across a creek. This will require an immediate expenditure of $50 000, but will save citizens an estimated $5 000 in travel costs every year over the next twenty years. Alternatively, they could renovate an existing bridge. This would only cost $20 000, but the saving in travel costs would only be $2 000 every year. If the council's MARR is 5%, what is the BCR for upgrading from the renovated bridge to the new bridge?

In cost-benefit analysis associated with public projects, all costs and benefits should be evaluated in terms of

Which of the following is an example of a remedy for a market failure?

A new public arena costs $60 million. The largest portion of this amount, $40 million, is for the land acquisition and major earthworks with infinite service life. The remaining $20 million is for the arena itself, which will be in operation for 20 years. Maintenance of the arena requires $2 million per year. Assuming a 5% MARR, what annual benefit is required for the benefit cost ratio to be greater than 1?

The following mutually exclusive projects are available. Which should be chosen?

A bridge costs $450 000 to build and $12 000 per year to maintain. The bridge is repaved every 10 years for $300 000. Assume that the bridge will last for 60 years and that the annual interest rate is 8%. How many crossings are needed daily to justify the bridge if each user's willingness to pay for the crossing is $2?