Reference no: EM132460928

Question 1:

(a) Describe how one ought to go about accounting for these costs and benefitsover time in order to discern whether the overall benefits exceed the overallcosts.

(b) Suppose a discount rate of 2% were applied to both costs and benefits, whichis roughly OMB's current guideline for very long-run benefits and costs. Usingthis discount rate, what is the present value of costs? What is the presentvalue of benefits? Are the policies worthwhile?

(c) repeat exercise (b) for each of the following discount rates: 1% for both costsand benefits, 5% for both costs and benefits, 7% for both costs and benefits.Try other discount rates you might think are appropriate.

(d) Suppose you are unsure about which discount rate is most appropriate. Is itbetter to err by using a rate that is too low or one that is too high? In otherwords, if the unknown "true" discount rate should be one number, but youuse a number in your benefit-cost analysis that is randomly different from thetruth, do you make a larger error in terms of the net present value if you usea discount rate that is too low or a discount rate that is too high? How might this matter?

Question 2: Some environmental laws in the United States explicitly prohibit the use of benefit-cost analysis in some areas of environmental policy. For example, the Clean AirAct declares that air quality standards are to be determined purely on the basis ofprotecting public health with "an adequate margin of safety," and forbids the admin-istrator of the Environmental Protection Agency from considering costs in settingstandards. Can you provide a critique of such an approach, from the perspective ofeconomic efficiency? What might be the consequences of such an approach? Nowtake a step back. Why or why not?

Question 3: Briefly explain the difference between utilitarian and categorical imperative moral philosophies. Which philosophy would be more likely to ascribe to economic effi-ciency as an appropriate guide for decision making?

Question 4: Do you think Rawlsian "veil of ignorance" moral philosophy is consistent with orcontrary to utilitarianism? Explain your reasoning.

Question 5: What are some of the critiques of economic benefit-cost analysisas described by Keohane and Olmstead and what are their counter-arguments?Which critique do you find most persuasive?