The Los Angeles Area Has Long Been Plagued by Urban

Essay

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?