Question 1

For a given policy option, if the ratio of the present value of benefits (PVB) to the present value of costs (PVC) is greater than zero, that policy option is considered to be feasible.

Accepted Answer

The feasibility of a policy option is not determined solely by the ratio of the present value of benefits to the present value of costs being greater than zero. This ratio indicates the cost-effectiveness or benefit-cost ratio of the policy. A policy is considered feasible if the benefits outweigh the costs (i.e., the ratio is greater than one), not just greater than zero.

Question 2

President Reagan was the only U.S. president to support the use of economic criteria in policy decision making.

Accepted Answer

Multiple U.S. presidents have considered economic criteria in policy decision making, not just President Reagan. Economic considerations have been a key factor in the policy decisions of many administrations.

Question 3

Achieving cost-effectiveness means that the present value of costs (PVC) is minimized for some pre-established benefit goal.

Accepted Answer

Achieving cost-effectiveness involves minimizing the present value of costs while achieving a specific benefit goal.

Question 4

In conducting a benefit-cost analysis, it is more difficult to assign a dollar value to costs than to benefits.

Accepted Answer

It is often more difficult to assign a dollar value to benefits than to costs because benefits, such as environmental improvements or health benefits, can be intangible and harder to quantify in monetary terms compared to costs, which are usually tangible expenses incurred.

Question 5

Deflating refers to the process of converting a real value into its nominal value.

Accepted Answer

Deflating refers to the process of converting a nominal value into its real value by adjusting for inflation, not the other way around.

Question 6

Present value determination is a procedure that corrects a value for the rate of inflation.

Accepted Answer

Present value determination is a procedure that discounts future cash flows to their value today, considering the time value of money, not specifically for the rate of inflation.

Question 7

Matters of equity are explicitly integrated into the decision rules that govern benefit-cost analysis.

Accepted Answer

Benefit-cost analysis traditionally focuses on efficiency rather than equity. Matters of equity are considered separately and are not explicitly integrated into the decision rules of benefit-cost analysis.

Question 8

Selecting the social discount rate is among the issues debated in the use of benefit-cost analysis for public policy evaluation.

Accepted Answer

Yes, selecting the social discount rate is one of the key issues discussed in the use of benefit-cost analysis for evaluating public policy decisions. The social discount rate is used to calculate the present value of future costs and benefits, which can have a significant impact on the overall outcomes of the analysis. However, there is no consensus on the appropriate social discount rate to use, as different perspectives and assumptions can lead to different rates.

Question 9

The present value of benefits (PVB) is equal to Σ(b_t/[1+r_s]^t), with b_t= B_t/(1 + p)^t.

Accepted Answer

This formula is a correct representation of the present value of benefits. The present value of benefits is the current value of the expected cash flows that an individual or entity will receive from a specific investment, after discounting them back to their current value based on the time value of money (represented by the rate r in the formula). The formula includes the benefits to be received, the timing of when they will be received, and the discount rate used to calculate their present value.

Question 10

To achieve allocative efficiency, the present value of net benefits (PVNB) must be minimized.

Accepted Answer

To achieve allocative efficiency, the present value of net benefits (PVNB) must be maximized, not minimized. Allocative efficiency occurs when resources are allocated to their most valuable use, which maximizes the net benefits to society. This means that the benefits of the last unit produced should be equal to its costs, resulting in the maximum PVNB.

Question 11

The discount rate used for public policy decision making is called the social discount rate.

Accepted Answer

The discount rate used for public policy decision making is indeed called the social discount rate. This rate takes into account the societal benefits and costs of a project or policy over a period of time, and is different from the commercial discount rate used for private investment decisions.

Question 12

For a given policy option, if (PVB - PVC) is greater than 1, that policy option is considered to be feasible.

Accepted Answer

The feasibility of a policy option is typically not determined solely by the difference between its Present Value of Benefits (PVB) and Present Value of Costs (PVC) being greater than 1. Feasibility involves a broader assessment including economic, technical, legal, and operational considerations.

Question 13

The first U.S. president to explicitly include the efficiency criterion in the regulatory review process was President Clinton.

Accepted Answer

The first U.S. president to explicitly include the efficiency criterion in the regulatory review process was President Ronald Reagan with Executive Order 12291 in 1981, which required cost-benefit analysis for new regulations.

Question 14

If the real value of an environmental cost in 2011 is $2,500, its nominal value in 2010, assuming a 2 percent inflation rate, must have been $2,550.

Accepted Answer

The nominal value in 2010 can be calculated as $2,500 / (1 + 0.02) = $2,450.98, which is not equal to $2,550.

Question 15

Present value determination is a procedure that
A) accounts for the opportunity cost of money
B) adjusts for changes in the general price level
C) discounts a present value into its future value
D) compares the present value of benefits to the present value of costs

Accepted Answer

Present value determination involves calculating the current value of future cash flows by discounting them back to their present value. This discounting process takes into account the opportunity cost of money (i.e., the fact that money is more valuable today than in the future due to inflation and other factors). Therefore, choice A is the correct answer. Choice B refers to inflation adjustment, which is not directly related to present value determination. Choice C is the opposite of the present value determination process, and choice D is related to cost-benefit analysis, which is a broader concept.

Question 16

The present value of $525 received one year from today, assuming an annual rate of return of 5 percent is
A) $551.25
B) $525
C) $500
D) none of the above

Accepted Answer

The present value (PV) is calculated using the formula PV = FV / (1 + r)^n, where FV is the future value ($525), r is the annual rate of return (0.05), and n is the number of years (1). Plugging in these values gives PV = $525 / (1 + 0.05)^1 = $500.

Question 17

If the nominal value of a benefit in 2011 is $1,500, its real value in 2012, assuming a 3 percent inflation rate, is $1,545.

Accepted Answer

If the nominal value of a benefit in 2011 is $1,500 and the inflation rate is 3 percent, then the real value in 2012 would be $1,456.50 ($1,500/(1+0.03)).

Question 18

According to the text application on the UK Climate Change Act, the Impact Assessment presented for this policy when proposed, gave benefit and cost estimates of the proposed regulation up to 2050.

Accepted Answer

The text states that the Impact Assessment presented for the UK Climate Change Act gave benefit and cost estimates of the proposed regulation up to 2050.

Question 19

The future value (FV) of a dollar is its present value (PV) plus the opportunity cost of not using that dollar in the present period.

Accepted Answer

The future value of a dollar is the amount it will be worth at a certain point in the future, given a certain interest rate or rate of return. The present value of a dollar is its value today, and the opportunity cost is the potential return that could be earned by investing that dollar instead of spending it now. Therefore, the future value of a dollar is calculated as its present value plus the opportunity cost of not investing it in the present period.

Question 20

The term, 1/(1 + r)^t is known as the discount rate, where r represents the discount factor.

Accepted Answer

The term 1/(1 + r)^t represents the discount factor used to calculate the present value of future cash flows, not the discount rate itself. The discount rate is represented by "r" in this formula.

Quiz 9: Benefit-Cost Analysis in Environmental Decision Making