Homework+4

# Homework+4 - b If the social discount rate is 10 per year...

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Homework #4 ARE 176: Environmental Economics Due on November 9 th 1. An investment of \$100 today will avoid \$1,000,000 of environmental damage in 100 years. a) At a discount rate of 10%, is this investment a good idea? b) At a discount rate of 1%, is this investment a good idea? c) At a discount rate of 2%, what is the maximum we would be willing to pay to avoid the million dollars of environmental damage in 100 years? 2. A dam is proposed on a stretch of wild river, a river that is currently used for recreation. The dam will generate electricity. The dam will have a useful life of 50 years, after which its reservoir will be full of sediment and the dam will need to be removed. The following are the characteristics of the dam: Initial cost: \$100,000,000 Electricity produced: 100,000 Mwh per year, @ \$100/Mwh Cost of decommissioning dam: \$10,000,000 Value of recreation lost: \$5,000,000 per year a) If the social discount rate is 3% per year, is the dam a good idea?
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Unformatted text preview: b) If the social discount rate is 10% per year, is the dam a good idea? 3. There is currently a proposal to remove four dams on the Snake River, to help restore severely-depleted salmon runs. This is costly in the short run to society because of adjustments in the electricity generation industry and agriculture. The annual benefits are improved whitewater recreation, better aquatic habitat, and in particular, improved runs of salmon for fishing and other uses. The best estimates of the costs of the proposal are: Year 1 2 3 Cost (in billions) 22 12 2 a) If the average annual benefits from improved aquatic habitat (which will last forever, starting in year 1) are \$2 billion per year, would the proposal pass a benefit-cost analysis with a discount rate of 6%? b) Until recently a 10% discount rate was required for federal projects. Would the proposal pass a benefit-cost analysis using such discount rate?...
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