Deck 7: Benefit-Cost Analysis: Benefits

Question 1

The change in consumer surplus resulting from an increase in environmental quality (a public good)can be measured in the same way as the change in consumer surplus for a private good.

Answer 1

True

Question 2

If a policy analyst imputes marginal willingness to pay for environmental quality to be equal to: MWTP = 245 - 1.5EQ,where EQ represents a measure of environmental quality,what is the change in consumer surplus associated with an increase in EQ from 60 to 70 units?

Answer 2

To calculate the change in consumer surplus,we first calculate the level of consumer surplus for each level of environmental quality and then we compute the difference between them.When EQ = 60 units,MWTP = $155 and consumer surplus will be the area of a triangle with height 90 and width 60 which is equal to $2,700.When EQ = 70 units,MWTP = $140 and consumer surplus will be the area of a triangle with height 105 and width 70 which is equal to $3,675.The change in consumer surplus is therefore equal to 3,675 - 2,700 = $975.Consumer surplus increases by $975 when EQ increases from 60 to 70 units.

Question 3

Suppose public authorities were contemplating locating a hazardous waste incinerator in a particular community.If the members of this community offered to pay $25,000 to keep it out of their area,this amount is equal to their ________ for clean air.

A)willingness to accept
B)willingness to pay
C)use value
D)consumer surplus

Answer 3

B

Question 4

List and very briefly explain three criticisms of the travel-cost method of imputing WTP for environmental amenities.

Question 5

In the following figure,assume that improvements in air quality shift the marginal cost of production from MC₁ to MC₂.If the producer surplus is used as an approximation of the benefits from improving environmental quality,the maximum the producers would be willing to pay for the reduction in pollution is ________ when the market price of the good is P₁.

A)area E
B)areas E + D + C
C)areas D + C
D)area B + D

Question 6

Preventative expenditures,hedonic estimation,surrogate markets and contingent valuation are all examples of ________.

A)indirect approaches of cost estimation
B)indirect approaches of benefit estimation
C)direct approaches of cost estimation
D)direct approaches of benefit estimation

Question 7

In surveys and experimental work where people are asked to compare gains and losses relative to a reference point,they place a higher value on losses from this reference point than gains.
This explains why WTA measures tend to be higher than WTP.

Question 8

In the following figure,the producer surplus for an output level of 60 units is equal to ________.

A)$900
B)$1,800
C)$2,100
D)$3,000

Question 9

Assume reductions in the amount of ground level ozone shift the marginal cost of producing alfalfa from MC₁ = 45 + 2Q_S to MC₂ = 45 + 0.5Q_S.Use the producer surplus to estimate the maximum amount alfalfa producers would be willing to pay for this improvement in the air quality if the market price of alfalfa is $60/unit of output.

Question 10

It is possible to estimate ________ by considering information about reductions in worker productivity and medical expenditures.

A)demand for health care
B)health damages
C)output losses
D)willingness to pay for hospitals

Question 11

Changes in productivity,health-care costs,loss of human capital and replacement/restoration of damaged property or businesses are all examples of ________.

A)indirect approaches of cost estimation
B)indirect approaches of benefit estimation
C)direct approaches of cost estimation
D)direct approaches of benefit estimation

Question 12

In the following figure,consumer surplus associated with 5 units of environmental quality is equal to ________.

A)$25.00
B)$62.50
C)$125.00
D)$187.50

Question 13

When people are asked willingness-to-accept questions,their answers are usually higher than their willingness-to-pay responses for the same item.

Question 14

In the following figure,consumer surplus associated with 3 units of environmental quality is equal to ________.

A)$4.50
B)$9.00
C)$13.50
D)$18.00

Question 15

The benefits of improved environmental quality come about because of reduced damages.

Question 16

List the four methods that can be used to impute willingness to pay for environmental improvements.

Question 17

In the following figure,the producer surplus for an output level of 3 units is equal to ________.

A)$7.50
B)$5.25
C)$4.50
D)$2.25

Question 18

The amount that a person would accept in order to be compensated for a small loss in air quality is called his/her ________.

A)willingness to pay
B)willingness to accept
C)consumer surplus
D)change in consumer surplus

Question 19

A major advantage of using contingent valuation methods is the fact that they rely on surveys.
Although it is true that surveys are relatively easy to administer,they are also prone to bias since respondents will have incentives to misrepresent their true WTP for the environmental amenity.Other problems inherent with surveys include the biases of the creator of the survey questions,problems with small sample size and self-selection issues.These problems associated with the use of surveys make them a "disadvantage" of CVM.

Question 20

If the inverse demand equation for a market good is equal to: P^D = 105 - 0.5Q^D.What is the consumer surplus associated with consumption of 20 units of the good?

Question 21

List and very briefly discuss the strengths and weaknesses of contingent valuation methods for imputing WTP for environmental amenities.