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The Safe Water Drinking Act required the United States Environmental Protection Agency to establish action standards for lead in drinking water. The...

5.. The Safe Water Drinking Act required the United States Environmental Protection Agency to establish action standards for lead in drinking water. The EPA evaluated three options (labelled A, B and C below) using cost-benefit techniques. A selection of the results of this analysis is presented in the following table.
The Safe Water Drinking Act required the United States Environmental Protection Agency to establish action standards for lead in drinking water. The EPA evaluated three options (labelled A, B and C below) using cost-benefit techniques. A selection of the results of this analysis is presented in the following table. Option A B C Total benefits $68 957 $63 757 $24 325 Total costs $6 272 $4 156 $3 655 Benefit to cost ratio 11.0 15.3 6.7 Marginal benefit (MB) $5 192 $39 440 $24 325 Marginal cost (MC) $2 117 $500 $3 665 MB to MC ratio 2.5 78.8 6.67 Monetary values in the table are 1988 $ million, based on a 20-year life, discounted to present value at 3%. Option A involves the strictest standard, Option C the least strict, with B intermediate. The marginal cost and benefit figures refer to incremental costs/benefits incurred in moving from no control to Option C, from Option C to Option B, and from Option B to A respectively. The US Environmental Protection Agency selected Option B. Is Option B the economically efficient choice? Given that all figures in the table are in present value terms, the net present value of each option is obtained by subtracting total cost from total benefit. This gives a NPV for each option as: A: $62,685 B: $59,601 C: $20,670 The economically efficient option is the one that generates the highest NPV; here that is option A. Although B has the highest benefit:cost ratio (and the highest marginal benefit:marginal cost) ratio, it is not the efficient option. Note: This question is based on an extensive discussion of using cost-benefit analysis to analyse lead standards in the USA in Goodstein (1995), pages 133-140. The reader might like to consult that reference for further analysis, including the case where uncertainty is present.
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