Cost Benefit Analysis - Essay Prowess
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# Cost Benefit Analysis

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1.Consider two projects, A and B, yielding improvements to a highway. The only output of project A is expected to be a 0.3% reduction in the risk to life for users of the highway. Project B, on the other hand, is expected to reduce the risk to life by 0.5% but costs twice as much as project A.

Explain why cost benefit analysis CAN’T be used to decide between these two projects with the given information but cost-effectiveness can. Which project should be preferred according to a cost-effectiveness criterion, and why?

2.Compare and contrast cost-benefit analysis and profit-loss analysis. I.e. discuss the ways in which these two tools are similar and the ways in which they are different.

3.Explain the difference between a Pareto improvement (PI) and a potential Pareto improvement (PPI). Which term best describes a policy change that results in a positive net social benefit?

4.Read the paper “Why is cost-benefit analysis so controversial” (Frank, June 2000) and then SUMMARIZE the critiques and responses on pages 913 to 917 (I have provided a PDF copy of the paper on CourseSpaces). Note that you do NOT need to discuss the specific analysis of Survey and Hedonic methods contained on pages 918+.

5.Consider a market for good X with supply and demand schedules given by the following equations. Assume all prices are in dollars per unit.

a.Calculate the market price and equilibrium quantity for the exchange of X. Show all your work. [will be awarded without accompanying calculations]

b.Draw the market for X, showing the supply and demand functions and equilibrium.

c.Neatly and clearly label/indicate the following areas on your graph.

i.Total benefit from consumption iv.Total revenue for producers

ii.Total expenditure by consumers v.Total opportunity cost of resources used in production

iii.Net benefit of consumption vi.Net benefit of production

d.Calculate each of the areas from part c. Show all your work. [3 marks – No marks will be awarded without accompanying calculations]

i.Total benefit from consumption  iv.Total revenue for producers

ii.Total expenditure by consumers v.Total opportunity cost of resources used in production

iii.Net benefit of consumption vi.Net benefit of production.

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