Question 1

The indirect benefits of a project or activity are external, or third party, benefits.

Accepted Answer

Indirect benefits of a project or activity refer to external or third-party benefits. These benefits are not directly experienced by the entity or individual performing the project or activity, but instead, they are enjoyed by others in the surrounding community or society as a whole.

Question 2

Which of the following would be considered an indirect cost of a public good?

Accepted Answer

Indirect costs are those that are not directly tied to the production or provision of a good or service but are still incurred as a result of the project. Disruption of traffic caused by subway construction is an example of an indirect cost because it is a consequence of the construction process rather than a direct expense related to building or operating the subway.

Question 3

One of the strengths of cost-benefit analysis is that the relatively low cost of performing a credible cost-benefit analysis makes the approach practicable for many public investment decisions.

Accepted Answer

Cost-benefit analysis can be complex and expensive due to the need for comprehensive data collection, analysis, and the valuation of intangible benefits and costs, making it not necessarily low cost.

Question 4

One of the strengths of cost-benefit analysis is that when indirect benefits must be estimated there are strict standards which prevent the analysis from being "cooked" to show what its sponsors wish to show.

Accepted Answer

Cost-benefit analysis often involves subjective judgments, especially in estimating indirect benefits, which can lead to analyses being influenced by the biases or desires of those sponsoring or conducting the analysis. There are guidelines and best practices, but these cannot fully eliminate the potential for manipulation or "cooking" the results to favor a desired outcome.

Question 5

One of the pitfalls of cost-benefit analysis is that indirect benefits must be estimated but no strict standards are used.

Accepted Answer

Indirect benefits, such as improved public health or reduced traffic congestion, are often difficult to quantify and are subject to estimation with varying degrees of accuracy. There are no strict standards for estimating these indirect benefits, leading to potential inconsistencies and subjectivity in the analysis.

Question 6

The State Legislature is attempting to choose two projects from the following:
  
If the state uses a discount rate of 6% and all the above projects are estimated to have a life of 20 years, the Legislature should accept Project C.

Accepted Answer

The answer of The State Legislature is attempting to choose...

Question 7

In the United States, public sector purchases of goods and services:

Accepted Answer

According to the latest data from the Bureau of Economic Analysis, public sector purchases of goods and services accounted for about 29 percent of GDP in 2020.

Question 8

To maximize the net social benefit received from a good or service, it should be produced up to the point where:

Accepted Answer

Maximizing net social benefit occurs when a good or service is produced up to the point where its marginal social benefit is equal to its marginal social cost. This takes into account both the private benefit and externalities (positive or negative effects on third parties) associated with the production and consumption of the good or service. Option A only takes into account social benefit and cost, whereas option B only takes into account private benefit and social cost. Option D only takes into account social benefit and private cost, and option E only takes into account private benefit and cost. Therefore, option C represents the best choice for maximizing net social benefit.

Question 9

All of the following would be considered a direct cost of a public good EXCEPT:

Accepted Answer

The disruption of traffic caused by subway construction is not a direct cost of a public good as it does not directly relate to the production or provision of the public good. It is instead an indirect cost or externality that is incurred by the general public. The other options listed are all direct costs that are necessary for the production and provision of a public good.

Question 10

In calculating costs of a public investment project, indirect costs, because of their partly nonmarket nature, are often easily estimated.

Accepted Answer

Indirect costs can be difficult to estimate as they often involve externalities or spillover effects that are not captured in market prices.

Question 11

The direct benefits of a project or activity are the benefits obtained by the users of the project or activity.

Accepted Answer

Direct benefits are the benefits that are obtained by the users of a project or activity, such as increased access to services, improved quality of life, or increased economic opportunities. Indirect benefits are the broader benefits that are generated as a result of the project or activity, such as increased employment or economic growth.

Question 12

In calculating costs of a public investment project, indirect costs are always difficult to estimate because of their partly nonmarket nature.

Accepted Answer

Indirect costs such as environmental impact, social effects, and other nonmarket factors can be difficult to quantify and estimate in a cost-benefit analysis.

Question 13

A pure public good is a product or service that:

Accepted Answer

A pure public good is both indivisible, meaning it cannot be divided into separate parts or units, and nonexcludable, meaning no one can be excluded from its benefits. Examples include national defense, public parks, and radio broadcasts.

Question 14

One of the pitfalls of cost-benefit analysis is that the opportunity-cost approach to the social rate of discount may bias the analysis against worthwhile public undertakings.

Accepted Answer

The opportunity-cost approach to the social rate of discount can result in a higher discount rate, which can make the present costs of a public undertaking appear higher than the future benefits. This can lead to undervaluing the benefits and overvaluing the costs, potentially biasing the analysis against worthwhile public projects.

Question 15

The benefit-cost ratio for an activity is equal to:

Accepted Answer

The benefit-cost ratio is a measure used to evaluate the economic efficiency of an activity. It is calculated by dividing the present value of the total benefits by the present value of the total costs. This takes into account the time value of money and allows for a more accurate assessment of the long-term impacts of the activity. Choice A is incorrect because it does not consider the time value of money. Choice B is incorrect because it only considers private benefits and ignores any external or third-party benefits. Choice D is incorrect because it only considers private benefits and ignores any external or third-party costs. Choice E is incorrect because it does not divide the present value of the benefits by the present value of the costs.

Question 16

The marginal social benefit of a good is equal to:

Accepted Answer

The answer of The marginal social benefit of a good...

Question 17

One of the pitfalls of cost-benefit analysis is that the sheer cost of performing a credible cost-benefit analysis makes the approach unfeasible for many public investment decisions.

Accepted Answer

Cost-benefit analysis requires significant time, resources, and expertise to perform accurately, and these costs can outweigh the benefits of using the approach for certain public investment decisions. As a result, cost-benefit analysis may not be feasible or practical for some projects, particularly those with limited budgets or resources.

Question 18

One of the strengths of cost-benefit analysis is that the opportunity-cost approach to the social rate of discount is an unbiased method of introducing cost of funds into the analysis of worthwhile public undertakings.

Accepted Answer

The answer of One of the strengths of cost-benefit analysis...

Question 19

The social rate of discount is the discount rate appropriate for evaluating public sector projects.

Accepted Answer

The social rate of discount is the appropriate discount rate for evaluating public sector projects because it reflects the preferences of society as a whole for consuming goods and services today versus in the future. It takes into account factors such as economic growth, social well-being, and environmental sustainability. This distinguishes it from private discount rates, which are based on individual preferences and market conditions.

Question 20

Economists consider a pure public good to be nonexcludable if:

Accepted Answer

A pure public good is considered nonexcludable if it is difficult or impossible to keep it from consumers who do not pay for it. This means that individuals who do not contribute to the good's production or maintenance cannot be prevented from enjoying the benefits of the good.

Quiz 15: Economics of Public Sector Decisions