Deck 10: Public Sector Decision Making

Question 1

What is contingent valuation?

A)assigning a value to an intangible good based on the results of surveys
B)assigning a value to an intangible good based on how much people will pay to obtain it
C)assigning a value to an intangible good based on its historical price
D)assigning a value to an intangible good based on its price in an ideal free market
E)assigning a value to an intangible good based on what it would cost to provide a substitute for it

Answer 1

A

Question 2

The point of view used in Benefit-Cost Analysis is associated with

A)market participants.
B)social groups.
C)shareholders of a business.
D)the government.
E)consumers of a good or service.

Answer 2

B

Question 3

One of the following is a fundamental difference between financial analysis and BCA. Which one?

A)Inflation is not included in BCA.
B)Tax effects are not included in BCA.
C)Time value of money is not reflected in BCA.
D)Operating costs are not included in BCA.
E)Capital costs are not included in BCA.

Answer 3

B

Question 4

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

A)building a refinery
B)building a hospital
C)building an assembly plant
D)building an apartment complex
E)building a movie theatre

Question 5

All of the following EXCEPT one are reasons for monopolies to be regulated. Which is the exception?

A)Monopolies are guaranteed to make economic profits in the long run.
B)Monopolies are inefficient.
C)The existence of monopolies may lead to a more unequal distribution of benefits.
D)Monopolists produce below efficient level of production.
E)Monopolies charge excessive prices.

Question 6

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

A)BCA does not take into account time value of money.
B)BCA ignores marginal principle.
C)BCA is a partial equilibrium analysis.
D)BCA uses market values.
E)BCA uses market interest rate.

Question 7

Which of the following is an example of an intangible benefit?

A)improved technology
B)improved custom service
C)improved quality of a good
D)improved safety
E)improved design

Question 8

Which of the following is viewed as direct costs?

A)depreciation
B)advertising
C)insurance
D)costs of raw materials
E)registration

Question 9

A study shows that widening a road shoulder by 0.3 metres results in a 10% decrease in fatal traffic accidents. Trying to improve the road safety of the Provincial part of a federal highway, a Provincial Department of Transportation widened the highway shoulders by 0.9 metres. Based on the data provided by the Transportation Safety Board (1997)in the table below, calculate the fatal accident cost savings that resulted from this project. Assume that the Provincial Department of Transportation used to record 10 fatalities on average per year on this part of the highway.

A)$1.56 million
B)$3.12 million
C)$4.68 million
D)$6.24 million
E)$7.80 million

Question 10

What economic conditions underlie market failures?

A)External costs are greater than private costs.
B)There is environmental damage which is addressed by environmental tax.
C)There is a monopolist who sets the price equal to the marginal cost.
D)All costs are born by market participants.
E)Aggregate benefits to all persons are less than aggregate costs imposed.

Question 11

When a community puts pressure on a municipal government to preserve the municipal park, this is an example of

A)regulation.
B)command and control policies.
C)monetary incentives.
D)litigation.
E)informal methods.

Question 12

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

A)monopolistic competition
B)perfect competition
C)oligopoly
D)monopoly
E)market failure

Question 13

An environmental tax is an example of

A)a policy regulation.
B)a government takeover.
C)a financial incentive or deterrent.
D)a legal response.
E)a market failure.

Question 14

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

A)market values.
B)social values.
C)marginal willingness to pay.
D)market supply and demand.
E)profitability.

Question 15

Total benefits of a public project to a society

A)include the value of all goods and services that result from a project, and effects of a project can be either positive or negative.
B)include the value of the goods and services directly produced by a project, and effects of a project can be either positive or negative.
C)include the value of all goods and services that result from a project, and effects of a project are generally positive.
D)include the value of the goods and services directly produced by a project, and effects of a project are generally positive.
E)include only feasible goods and services resulted from a project, and effects of a project can be either positive or negative.

Question 16

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

A)how much people say they value that good when surveyed.
B)how much an ideally rational individual would pay for that good.
C)the popularity of a political party that advocates that good.
D)how much it would cost the government to provide a substitute for that good.
E)how much people are prepared to pay to acquire that good.

Question 17

"Although it goes without saying that all relevant costs and benefits must be taken into account, the number of potential mistakes in applying the principle [of Account Comprehensively for Benefits and Costs] is surprisingly large. In the transit domain, for example, studies ... fail to assign economic value to ________." (HLB Decision Economics Inc., 2004).

A)operating costs
B)reduction in risk of traffic accidents
C)revenues collected
D)capital costs
E)taxes paid

Question 18

Engineering decisions associated with public projects should be based on

A)market costs and benefits.
B)environmental costs and benefits.
C)marginal willingness to pay.
D)marginal costs and benefits.
E)social costs and benefits.

Question 19

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

A)It includes social costs.
B)It includes the effects of inflation.
C)It provides a measure of the net gain per dollar invested by the project sponsor.
D)It is easier to calculate.
E)It includes the effects of taxation.

Question 20

How should market failures be addressed?

A)through the establishment of barriers to enter the market
B)through the replacement of social equilibrium by market equilibrium
C)through free market interactions between consumers and producers
D)through government intervention and the courts
E)through market deregulations

Question 21

There are four mutually exclusive alternatives to build a rural road. Present worth of social benefits and costs as well as benefit-cost ratios are presented in the following table: Based on this information, what alternative should be chosen?

A)A
B)B
C)C
D)D
E)None

Question 22

When choosing the appropriate interest rate to evaluate a public project, which of the following should be used?

A)current market interest rate
B)the rate of return on private investment
C)social discount rate
D)private sector MARR
E)external rate of return

Question 23

A city council is planning to build a new bridge across a creek. This will require an immediate expenditure of $50 000, and an estimated $2 000 a year in maintenance, but will save citizens an estimated $5 000 in travel costs every year over the next twenty years. If the council's MARR is 5%, what is the BCRM for the project?

A)0.75
B)0.83
C)1.25
D)1.34
E)2.00

Question 24

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. If the council's MARR is 5%, what is the BCR for the project?

A)0.1
B)1.25
C)1.44
D)1.64
E)2.00

Question 25

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

A)new sewage system
B)new oil refinery
C)new computer network
D)new shopping mall
E)new hockey arena

Question 26

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?

Question 27

Suppose that as a result of a public project evaluation the following information was obtained:- PW of the project's capital costs = $9 million- PW of the project's operating costs = $5 million- PW of the project's benefits = $20 millionWhat is the BCRM for this project?

A)0.42
B)0.67
C)1.07
D)1.67
E)2.20

Question 28

What is a market failure and why is this concept so important in public decision-making?

Question 29

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?

Question 30

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

A)A
B)B
C)C
D)D
E)E

Question 31

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.

Question 32

Which of the following effects should not be considered in BCA?

A)direct benefits of the project
B)changes in opportunities as a result of the project
C)changes in income distribution
D)changes in supply and demand
E)changes in taxation

Question 33

The provincial department of transportation is considering investing in a provincial highway. Five mutually exclusive alternatives were identified. The present worths of their expected costs and benefits were calculated, and the data are summarized in the following table:
Calculate the BCR for each alternative, the incremental BCR and identify the best alternative.

Question 34

The conventional benefit-cost ratio of a public project reflects

A)the future worth of net social benefits per $1 of the future worth of social costs.
B)the future worth of social benefits per $1 of the future worth of social costs.
C)the present worth of net benefits per $1 of the present worth of the project's costs.
D)the present worth of social benefits per $1 of the present worth of social costs.
E)the future worth of social benefits per $1 of the present worth of social costs.

Question 35

One of major drawbacks of the benefit-cost ratios is

A)They are difficult to calculate.
B)Social benefits are not well defined.
C)Social costs are not well defined.
D)Ambiguity associated with a project's disbenefits.
E)Private benefits are not well defined.

Question 36

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?

A)0.75
B)1.20
C)1.25
D)1.64
E)2.00

Question 37

A city council is planning to build a new bridge across a creek. This will require an immediate expenditure of $50 000, and an estimated $2 000 a year in maintenance, but will save citizens an estimated $5 000 in travel costs every year over the next twenty years. If the council's MARR is 5%, what is the BCR for the project?

A)0.83
B)0.95
C)1.20
D)1.25
E)2.5

Question 38

A 10-year public project that required $1.5 million generates annual revenue of $0.2 million beginning from year 1. What is the project's rate of return on its investment?

A)5.6%
B)6.6%
C)7.6%
D)8.6%
E)9.6%

Question 39

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?

A)0.87
B)0.96
C)1.08
D)1.32
E)1.94

Question 40

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?

Question 41

Give two examples of monetary incentives/disincentives

Question 42

A provincial government in a small city is considering a project of the city dump-site. Three alternative sites were identified with the following economic characteristics:
Each site is expected to provide services valued at $3 million per year. Assume a 100-year study period, a 5% discount rate and a 10% sale value of the site after 100 years. Rank these sites in terms of their BCRs.

Question 43

What are the fundamental differences between financial analysis and social benefit-cost analysis?

Question 44

A provincial program is subsidizing programs for alternative energy usage. Suppose there are two programs to consider: (i)a system that uses solar energy, and (ii)a system that uses wind energy. Each system lasts 25 years and has the same expected benefits. Economic data on both systems are presented below:
If the MARR is 5%, which system is preferred from the viewpoint of a private producer and from the viewpoint of a public decision-making?

Question 45

Suppose than a public project has the following profile:
Assuming a social discount rate of 5%, calculate the project's BCR.

Question 46

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.

Question 47

Suppose there are two mutually exclusive public alternatives A and B. They are characterized by the following data:
Alternative A:
First cost = 10 million
Annual benefits = $2 million
Annual operating costs =$1 million
Alternative B:
First cost = $15 million
Annual benefits = $3.5 million
Annual operating costs = $1 million
Both alternatives have a 10-year service life. Social discount rate is 7%. Which alternative should be chosen on the basis of the conventional BCR?

Question 48

A government and a large corporation might each consider building a nuclear reactor to provide power to a city. What similarities and differences might there be in how they evaluated the project?

Question 49

Give at least two reasons for public decision making