ECON 2184Solutions ANSWERS TO EXERCISES (4th Edition) Cost-Benefit Analysis: Concepts and Practice by Boardman, Greenberg, Vining and Weimer

Chapter 1 Exercises 1. Imagine that you live in a city that currently does not require bicycle riders to wear helmets. Furthermore, imagine that you enjoy riding your bicycle without wearing a helmet. a. From your perspective, what are the major costs and benefits of a proposed city ordinance that would require all bicycle riders to wear helmets? b. What are the categories of costs and benefits from society’s perspective? 1.a. The most significant categories of costs to you as an individual are probably: the purchase price of a helmet, the reduced pleasure of riding your bicycle while wearing a helmet, diminished appearance when you take the helmet off (bad hair), and the inconvenience of keeping the helmet available. The most significant categories of benefits are probably: reduced risk of serious head injury (morbidity) and reduced risk of death (mortality). 1.b. There are a number of categories of costs and benefits that do not affect you (directly or are insignificant), but which are important in aggregate. These are:  program enforcement (a cost)  reduced health care costs (a benefit), although this may not be as high as one might expect if bicyclists ride more aggressively because they feel safer (this is called offsetting behaviour)  increased pollution, due to cyclists switching to cars (a cost) A social cost-benefit analysis would take account of these costs and benefits in addition to your costs. 2. The effects of a tariff on imported kumquats can be divided into the following categories: tariff revenues received by the treasury ($8 million); increased use of resources to produce more kumquats domestically ($6 million); the value of reduced consumption by domestic consumers ($4 million); and increased profits received by domestic kumquat growers ($5 million). A CBA from the national perspective would find costs of the tariff equal to $10 million-the sum of the costs of increased domestic production and forgone domestic consumption ($6 million + $4 million = $10 million). The increased profits received by domestic kumquat growers and the tariff revenues received by the treasury simply reflect higher prices paid by domestic consumers on the kumquats that they continue to consume and, hence, count as neither benefits nor costs. Thus, the net benefits of the tariff are negative (-$10 million). Consequently, the CBA would recommend against adoption of the tariff. a. Assuming the agriculture department views kumquat growers as its primary constituency, how would it calculate net benefits if it behaves as if it is a spender? b. Assuming the treasury department behaves as if it is a guardian, how would it calculate net benefits if it believes that domestic growers pay profit taxes at an average rate of 20 percent? 2.a. If the agriculture department behaved as if it were a "spender," then the benefits