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Assignment #1
Due: Saturday, May 30th by midnight
Directions
Please read the following directions carefully. If you do not follow the directions, your assignment will not be graded and
you will receive a zero.
Formatting Requirements
Assignment saved as a single PDF file; other file types will not be accepted and submissions of multiple files will
not be allowed. All pages in the document must be the same size and orientation.
All questions must be answered in the order they are given in the assignment. Questions or pages that are out of
order may not be graded. Details of formatting for specific question types are below:
o RESPONSES TO ALL QUESTIONS MUST BE TYPED in a sensible font, size, and spacing. I suggest leaving
your word processor on its default settings (e.g. if you’re using MS Word, the defaults are Calibri, 11pt,
and single spaced). Written responses should be thoroughly proofread for spelling and grammar.
Your full name and student-number must be in the top, left-hand corner of the assignment.
Questions
1. The City of Victoria is considering building a new public swimming pool. Analysts have estimated the following
impacts over the expected useful life of the pool (all in present values):
Impact Present Value ($ millions)
Funding grant from the provincial government 2.2
Construction and maintenance costs 12.5
Personnel costs 8.2
Revenue from user fees 10.8
Use value to recreational users of the pool 19.7
Scrap value 0.8
When answering the following questions, assume that only residents of Victoria have standing (i.e. assume the
municipality of Victoria is the referent group). Also, note that scrap value is a benefit received from reselling
resources used during the project after the end of its useful life.
A. The provincial funding grant is only available for this purpose. Should this grant be treated as cost, a
benefit, or neither? Explain why.
B. The construction and maintenance operations will have to be done by a Vancouver-based firm and
should be treated as a cost. The operating personnel, however, are part of the referent group. How
should we treat the payments to them? Explain your reasoning.
C. Suppose that 16% of users come from outside of Victoria and that these users are charged a higher
price, meaning that they pay 20% of the user fees collected at the pool.
i. Calculate and report the size of the use benefits (you don’t need to show work).
ii. Calculate and report the amount of benefit generated from fee revenues (you don’t need to
show work).
iii. Explain how you arrived at your answer.
D. Calculate and report the net present value of the project (show your work). According to the NPV rule,
should the municipal government proceed with this proposal?
2. The table below shows the net present value of costs and benefits for three proposed policy alternatives:
Policy A Policy B Policy C
PV Benefits 5 4 10
PV Costs 2 1 5
A. Calculate and report the NPV for each policy (you do not need to show your work). Which policy should
the government choose?
B. Calculate and report the ratios of PV benefits to PV costs for each policy. If the government bases its
choice on a cost-effectiveness criterion, which policy should it choose?
C. Do the NPV and cost-effectiveness criteria lead to the recommendation of the same project? Which rule
should the government follow if it wants to maximize social surplus? Using the concept of potential
pareto improvements, thoroughly explain why society will be better off with the rule you chose.
3. In Frank’s paper “Why is cost-benefit analysis so controversial”, the author identifies several critiques that
skeptics use to attack the usefulness of cost-benefit analysis. Briefly summarize those critiques – you should
present the critiques in an unbiased way, so do not include your own opinions (you’ll have a chance to respond
in the next question). 1 to 2 sentences per each critique is an appropriate length of response.
*Note: you do not need to include anything from the following sections (page numbers where these sections
start are in parentheses): “Survey Methods” (p 917), “Hedonic Methods” (p 919), “Positional Concerns and
Revealed Preference” (p 921) or “Impulse-Control Problems and Revealed Preference” (p 927)
4. In your opinion, should governments use cost-benefit analysis to help them choose between policies. Explain
why.
Marks Distribution
This assignment is graded out of 20 marks, distributed as follows:
1. Total: 8 marks A. 2 marks B. 2 marks C. 2 marks D. 2 marks
2. Total: 5 marks A. 1 mark B. 1 mark C. 3 marks
3. Total: 4 marks
4. Total: 3 marks
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