Deck 9: Benefit-Cost Analysis in Environmental Decision Making

Question 1

For a given policy option, if the ratio of the present value of benefits (PVB) to the present value of costs (PVC) is greater than zero, that policy option is considered to be feasible.

Answer 1

False

Question 2

President Reagan was the only U.S. president to support the use of economic criteria in policy decision making.

Answer 2

False

Question 3

Achieving cost-effectiveness means that the present value of costs (PVC) is minimized for some pre-established benefit goal.

Answer 3

True

Question 4

In conducting a benefit-cost analysis, it is more difficult to assign a dollar value to costs than to benefits.

Question 5

Deflating refers to the process of converting a real value into its nominal value.

Question 6

Present value determination is a procedure that corrects a value for the rate of inflation.

Question 7

Matters of equity are explicitly integrated into the decision rules that govern benefit-cost analysis.

Question 8

Selecting the social discount rate is among the issues debated in the use of benefit-cost analysis for public policy evaluation.

Question 9

The present value of benefits (PVB) is equal to Σ(b_t/[1+r_s]^t), with b_t = B_t/(1 + p)^t.

Question 10

To achieve allocative efficiency, the present value of net benefits (PVNB) must be minimized.

Question 11

The discount rate used for public policy decision making is called the social discount rate.

Question 12

For a given policy option, if (PVB - PVC) is greater than 1, that policy option is considered to be feasible.

Question 13

The first U.S. president to explicitly include the efficiency criterion in the regulatory review process was President Clinton.

Question 14

If the real value of an environmental cost in 2011 is $2,500, its nominal value in 2010, assuming a 2 percent inflation rate, must have been $2,550.

Question 15

Present value determination is a procedure that

A) accounts for the opportunity cost of money
B) adjusts for changes in the general price level
C) discounts a present value into its future value
D) compares the present value of benefits to the present value of costs

Question 16

The present value of $525 received one year from today, assuming an annual rate of return of 5 percent is

A) $551.25
B) $525
C) $500
D) none of the above

Question 17

If the nominal value of a benefit in 2011 is $1,500, its real value in 2012, assuming a 3 percent inflation rate, is $1,545.

Question 18

According to the text application on the UK Climate Change Act, the Impact Assessment presented for this policy when proposed, gave benefit and cost estimates of the proposed regulation up to 2050.

Question 19

The future value (FV) of a dollar is its present value (PV) plus the opportunity cost of not using that dollar in the present period.

Question 20

The term, 1/(1 + r)^t is known as the discount rate, where r represents the discount factor.

Question 21

According to President Reagan's Executive Order 12291,

A) economic criteria had to be met when reviewing any major regulation
B) a major regulation was defined as one having an annual effect of $1 million or more
C) only least cost is needed in evaluating major rules, with no consideration for maximizing net benefits
D) incremental benefits of policy must be maximized, with no consideration for minimizing incremental costs

Question 22

The present value of net benefits (PVNB) is

A) found as (PVB - PVC)
B) equal to the ratio of PVB to PVC
C) equal to the ratio of PVC to PVB
D) not relevant to benefit-cost analysis

Question 23

In order for a policy option to achieve allocative efficiency,

A) PVNB must be maximized
B) PVB must be minimized
C) PVC must be minimized
D) (PVB - PVC) must be minimized

Question 24

In the final phase of benefit-cost analysis, one of the steps that is generally conducted is

A) to compare time-adjusted benefits to zero
B) to compare time-adjusted costs to unity
C) to determine if PVB and PVC are inversely related
D) to determine if an option is feasible

Question 25

To achieve cost-effectiveness among options that satisfy the benefit objective

A) both PVB and PVC must be minimized
B) PVB must be minimized and PVC must be maximized
C) PVC must be minimized
D) none of the above

Question 26

If the value of an environmental benefit realized two years from today is $970.20, and the annual rate of return is 5 percent, then its present discounted value is

A) $924
B) $880
C) $1,018.71
D) $1069.65

Question 27

If, for a given policy option, PVNB equals $1,200, and PVC equals $800, then

A) the policy option is not feasible because the value of PVB is $400
B) the ratio, PVB/PVC, equals 1.5
C) the policy option is feasible because (PVB - PVC) is greater than unity
D) there is insufficient information to determine if the policy option is feasible

Question 28

Deflating refers to

A) discounting a future value into its present value by accounting for the opportunity cost of money
B) converting a real value into its associated nominal value
C) using the discount rate to correct for environmental benefits or costs accruing in some future time period
D) none of the above

Question 29

Among the chief concerns about the use of benefit-cost analysis is that

A) monetizing the benefits of a policy proposal is difficult
B) identifying and estimating implicit costs is a major challenge
C) equity might not be achieved if, for example, costs are distributed unevenly
D) all of the above
E) none of the above

Question 30

In the expression for present value of benefits (PVB), Σ(b_t/[1+r_s]^t), with b_t = B_t/(1 + p)^t,

A) b_t represents incremental nominal benefits
B) B_t represents incremental real benefits
C) b_t represents incremental real benefits
D) p stands for the opportunity cost of money

Question 31

When benefit-cost analysis is used to facilitate U.S. public policy decisions,

A) the discount rate is selected by the individual policy maker
B) no adjustment can be made for inflation, since the inflation rate is not known in advance
C) the discount rate used should reflect the social opportunity cost of funds
D) only incremental costs are adjusted for time differences

Question 32

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.
a. Since the policy will be implemented over time, economists assume that per resident benefits will accrue in increments of $500 (in real terms) at the end of each of the next three years. Find the present value of benefits (PVB) in nominal terms for each resident, assuming an annual inflation rate of 4% and a nominal annual discount rate of 9%.
b. 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?

Question 33

All of the following are true EXCEPT

A) President Reagan was the first U.S. president to call for the use of economic criteria when evaluating policy
B) President Reagan's Executive Order 12291 required the use of a Regulatory Impact Analysis (RIA) when major regulations were being considered
C) During his presidency, Clinton did not issue any executive order to continue Reagan's commitment to using economic criteria in policy evaluation
D) President Obama issued an executive order to support and expand upon President Clinton's executive order requiring benefits to justify the costs of a significant regulation

Question 34

If (PVB/PVC) for a given policy option equals 5.5, this means that

A) the policy option is not feasible
B) for every dollar of incremental costs incurred by society, there are $5.50 in realized incremental benefits
C) the policy option is feasible
D) both (b) and (c) are correct

Question 35

Who was the first U.S. president to explicitly refer to the efficiency criterion as part of the regulatory review process?

A) President Clinton
B) President George W. Bush
C) President Reagan
D) President Obama

Question 36

The present value of benefits (PVB) is found as

A) the discounted value of benefits for a single period without adjusting for inflation
B) Σ(b_t/[1+r_s]^t), with b_t = B_t/(1 + p)^t
C) Σ(b_t/[1-r_s]^t), with b_t = B_t/(1 + p)^t
D) Σ(b_t/[1+r_s]^t), with b_t = B_t/(1 - p)^t

Question 37

In a benefit-cost analysis, the determination of feasibility

A) can be made by finding out if PVB/PVC is greater than unity
B) is not critical and therefore is an optional step
C) can be accomplished by finding out if PVNB is greater than zero
D) all of the above
E) (a) and (c) only